What is Smart Contract?

Those interested in cryptocurrencies have frequently encountered the term “smart contract”. Smart contracts, also referred to as smart contracts, are computer software designed as a self-executing contract. These software perform the predetermined action if the predetermined conditions are met. 

Its most important feature is that it is a reliable structure that eliminates third parties. Thanks to smart contracts, agreements can be made safely without the need for a central authority, a legal system or an external enforcement mechanism. 

History of Smart Contracts

Although it is identified with cryptocurrencies today, the emergence of smart contracts predates Bitcoin. First defined in 1994 by American lawyer and cryptographer Nick Szabo, smart contracts emerged as computerized transaction protocols that fulfill the terms of a contract. Szabo, a law professor, suggested making such contracts for assets such as derivatives and bonds in an article he published. 

Speaking of Nick Szabo, let's not forget to mention that he invented a cryptocurrency called "Bit Gold" in 1998, exactly 10 years before Bitcoin emerged. Many people believe that Szabo is the anonymous inventor of Bitcoin named “Satashi Nakamato” because of Bit Gold. 

How Do Smart Contracts Work?

Just like traditional contracts, smart contracts are contracts between two or more parties where one party offers something of value to the other. The difference between a smart contract and a traditional contract is that a smart contract is a self-executing code that fulfills the terms of the contract. This code is sent as a transaction to an address on a Blockchain, where it is verified by that Blockchain's consensus mechanism. Once this transaction is included in a block, the smart contract is initiated and cannot be reversed.

There is a principle behind smart contracts called the “if-then principle”, which works as “if x happens, do y”. After the parties to the contract agree on the issue, the contract is prepared, signed cryptographically and uploaded to the Blockchain. Contracts uploaded to the Blockchain can communicate with other components in the Blockchain and thus send information to trigger the transaction specified in the contract. In this way, the conditions defined in the contract are executed automatically. 

Where Are Smart Contracts Used?

Smart contracts, which are frequently used in the Ethereum network in particular, are very popular in decentralized finance (DeFi) in general, and thousands of dApps use smart contracts in different ways in various Blockchain networks, from finance to gaming, from stock exchanges to media. 

We know that smart contracts are widely used in the cryptocurrency world, but it is predicted that they will have different areas of use in the future. It is thought that keeping the bureaucratic transactions between individuals required for sales of movable or immovable property, especially those that must be carried out through a third party such as a notary, in Blockchain through smart contracts will facilitate such transactions safely. It is also thought that smart contracts will be used by businesses in the future in areas such as buying-selling transactions or supply chain management. 

Advantages and Disadvantages of Smart Contracts

Smart contracts are trustworthy, autonomous, transparent and decentralized. Additionally, once deployed, they cannot be undone or changed. Smart contracts, which enable the contract to progress without the need for third parties, greatly reduce the cost and simplify the contract negotiation process. In a smart contract, the code defines the mechanisms of the transaction and is the final arbiter of the terms, but if there is a bug in the code, there is no way to override or modify the smart contract.

Legal Status of Smart Contracts

Although they are called contracts, smart contracts do not have any legal sanction. Its legal aspect and widespread use are currently a matter of debate. In 2020, Iowa, one of the states of the USA, took a step regarding the legal aspect of the business by legally recognizing smart contracts. There are studies conducted on the subject in different countries.