Those of you who are already familiar with the world of decentralization finance or DeFi certainly often hear about smart contracts. Not just a digital contract, a smart contract is a programming language in which both parties enter into a contract automatically on a blockchain system.
As a contract, a smart contract is deterministic, transparent, autonomous, distributed and immutable. These properties make it ideal for use as an exchange rate of trust between two parties who do not know each other on a DeFi network.
Smart Contracts Are Nick Szabo’s Creation
Smart contracts were first introduced in 1994 by Nick Szabo. He introduced a system that formalizes and secures computer networks by combining user interface protocols.
Szabo is a computer scientist who introduced bit gold in 1998, 10 years before Bitcoin was launched. He also initiated the idea of creating a payment system that combines securities products and derivatives markets in various formats.
The University of Washington graduate simplifies the explanation of smart contracts by likening them to a vending machine. Where, users only need to enter some money and choose the drink they want to buy. If the amount of money has been received, the user will get the drink he wants from the machine.
He predicts that in the future digital contracts will replace physical contracts, which he considers resource-intensive. Now, the smart contract initiated by him is even predicted to be the “key” of the financial services revolution in the future.
Smart Contracts in Blockchain
The use of smart contracts continues to develop into programs that run on blockchain platforms. This program creates a digital consent protocol whose rules are defined by computer code and agreed upon by network nodes.
Like a program, a contract consists of code and data recorded for a specific purpose. Anyone can create a smart contract through an Ether (ETH) account as long as they understand the programming language.
Users only need to translate the desired prerequisites so that the program can be executed via code. Once created, the smart contract can be released into the network by paying the gas fee as in normal transactions through an ETH account.
Now smart contracts are part of the transaction tool. Transactions are carried out by fulfilling the code. All transactions in smart contracts are recorded, cannot be deleted, and can be accessed by the public. Therefore, smart contracts are transparent.
Trust Is No Longer The Universal Currency
The contract mechanism like this allows the two parties to the agreement, not to know each other, let alone trust each other. As long as all prerequisites or code are met, then the contract can be executed.
Contracts are made based on computerized requirements in the form of code that is replicated and executed when all requirements are met. The code is distributed evenly across the network or blockchain.
Once created, this code cannot be changed or destroyed, unless the programmer inserts a self-destruct code in one of the functions. The code also records all changes that occur in full and can be accessed by the public.
Currently smart contracts have become one type of ethereum account (ETH). The use of smart contracts allows anonymous identities and foreigners to carry out credible transactions without the supervision of authorities or the legal system.
The autonomous nature of smart contracts makes them like a self-running program. It runs the program designed for it if all the requirements are met, no matter who has access to it.
In other words, the contract is made not on the basis of trust but on the basis of the fulfillment of all pre-programmed requirements. If you have a hard time trusting other people, smart contracts are definitely for you.