What is a Smart Contract?

You may have heard of smart contracts if you have followed crypto news for any length of time. They were made popular in particular thanks to the explosion of cryptocurrencies in 2016 – 2017. We will explain here what they are and what they are used for.

Smart contracts are like real contracts on paper in the real world, the difference is that they are in digital form. A smart contract is like a computer program stored inside the blockchain and below we will illustrate an example of a smart contract.

Nowadays there are several crowdfunding platforms and one of the best known is KickStarter. On this platform, projects of companies, products or services are proposed and the organizers solicit people to raise funds which will be used to finance the project in question.

Imagine a team that has developed a prototype of any product, say a flying car. On Kickstarter, this team presents its project and solicits investors for a fundraising, a minimum objective to be reached for the fundraising is determined.

Kickstarter works as a third party counterpart between the people who present their projects and the people who participate in fundraising and believe in the projects. In such a system, this means that both parties have to trust KickStarter in order to properly generate the money exchanged on its crowdfunding platform. If the fundraising goal achieves its goal, the team behind the project expects to receive the fundraising money, if on the contrary the fundraising goal is not met, the participants who have offered money expect reimbursement.

We therefore come to smart contracts, thanks to which a third party like Kickstarter is no longer necessary.

To go back to the previous example of crowdfunding, we can program a smart contract that will hold the participants’ money in the fundraiser until a goal is reached.

The participants thus send their money to the smart contract and as soon as the condition is met (the objective of the fundraising, let’s say $ 1,000,000) is reached, then the smart contract will release the money and transfer it automatically. to the project team.

If the fundraiser is unsuccessful and does not reach its objective, then the funds will be returned by the smart contract to the supporters of the project.

Smart contracts are stored inside the blockchain, which makes them perfectly secure since no one has control over the money here. What makes smart contracts reliable and the fact that they can be trusted is that once created on the blockchain, they can no longer be modified, no one can take control of the contract and change its terms and conditions.

In addition, being inked in the blockchain, the smart contract is validated by everyone in the network and therefore there can be no fraud. Several blockchains support smart contracts but the most important to date remains that of Ethereum, which was specially created for this type of smart contract.

We took the example of crowdfunding to illustrate how the smart contract works, but this technique can be applied to any number of things in everyday life. Smart contracts could be used for insurance, for mailings, for rental of housing or vehicles but also for money loans but also for real estate transactions that could be carried out without notaries for example!

You will thus realize where and how smart contracts can be used, but also to what extent they are likely to change the world in the years to come.

CryptoMugu