What are smart contracts on blockchain?


Table of Contents

  1. How smart contracts work.
  2. Uses of smart contracts
  3. Defi smart contracts
  4. Bottom line

By Glory Adebajo

Smart contracts are computer programs that automatically execute once the prerequisite conditions are met. Smart contracts are an integral part of blockchain technology, first proposed by Nick Szabo, an American computer scientist, in 1994. Blockchain smart contracts provide a nearly 100 percent efficient means of transactions between parties, as lack of trust is not an issue. Should be transactions will only be initiated when all the conditions are met.

How smart contracts work.

Smart contracts operate on the strength of the distributed ledger system of blockchain technology by following these steps:

1. Code creation: Agreement terms between parties are translated into lines of code. The line of code contains the rules and conditions that must be met for the contract to execute.

2. Deployment: The code is deployed on a blockchain network. Ethereum is the most used blockchain for deploying smart contracts.

3. Invocation: Anyone can interact with the smart contract by initiating a function or making transactions with the contract.

4. Validation: All parties on the blockchain network must validate the transaction as genuine. 

5. Execution: Once validated, the smart contract code is executed. For example, if a smart contract is an escrow agreement. In that case, it will release funds to the seller when the buyer acknowledges the receipt of a pre-agreed asset.

Uses of smart contracts

Defi smart contracts

They enable the functionalities of DeFi, such as stablecoins, lending, yield farming, borrowing and automated market makers.

Bottom line

Blockchain smart contracts are agreements written into lines of codes deployed on a blockchain network that are only initiated when all the parties involved meet the pre-set conditions.

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