The concept of smart contracts was first discussed in Nick Szabo’s (1997) paper, “The Idea of Smart Contracts”. He proposed smart contracts as a means to embed contractual clauses into digital assets. This meant that it could facilitate the exchange of money, shares, property or any content of value. Smart contracts are essentially self-operating programs with the terms of agreement between both buyer and seller being directly written into lines of cryptographic code which exists across the distributed blockchain network. With the assistance of oracle services, smart contracts can gather external inputs such as prices and other real-world data to process the transaction.
To illustrate, if Ethereum users intend to perform a transaction involving the delivery of 100 Ether to a counterparty on a stipulated date, all that is required is to simply input the data after creating a contract and the system would then spontaneously execute the command upon fulfilling the specific terms and conditions stated. Once the verification process is completed and the terms are met, the transaction is now approved.
Since these computer codes are stored in public databases, the automatic execution of smart contracts occurs in the absence of a third party. As a result, the immutability and transparency of the smart contract eliminates any plausibility of fraud, censorship, downtime or tampering.
An additional feature is escrow capability that ensures the locking of funds with a mediator such as a bank or an online market. Those funds can only be unlocked under conditions acceptable to contracting parties, ensuring higher security.
As blockchain technology continues to be developed and enhanced, we can expect trading procedures to be even more efficient.
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Disclaimer: This article is not trading or investment advice. It is for entertainment and educational purposes only. Please do your own research before investing into any digital currency.