What are Smart Contracts?
Smart contracts are computerized contracts that monitor, verify, or transfer the ownership of digital assets. They replace third-party intermediaries with code governing all transactions, making it possible to create secure peer-to contract without human interaction.
Smart contracts are currently being heavily used for Crypto-Currency transactions because they eliminate the risk of fraud. The first reported instance was published in late 1990s by Nick Szabo’s Digital gold and smart money. Smart contract applications are now being developed in almost every industry. The increased use of cryptocurrencies has led to an increased number of smart contract platforms appearing on the market today, some better than others depending on your properties and needs. Some examples include Ethereum, EOS, NEO, NEM.
The main advantage of smart contracts is their ability to execute an action once a specific condition is met. For example, imagine you have a rental contract with your landlord. Every month they will collect your rent and if you pay late you are penalized an amount based on the terms of the contract. But what happens if the payment is not received? How do you know if your landlord actually sent it? With smart contracts that are based on blockchain technology there are several key security components that make this possible.
Conditions are set up before the contract is initiated, for example, I can create a rental agreement with my landlord where funds are automatically transferred from my bank account to theirs every month at an agreed upon date and time. If I fail to make the agreed upon payment, the smart contract will automatically execute a process taking out a penalty for late payment.
Examples of basic contract actions
- Escrow – escrow is where a third party holds funds until both parties happy with the transaction until then, now this would be easy to do with smart contracts.
- Sub-contracts – using sub-contracts, I can define multiple conditions that require different levels of approval before an action can occur.
- A function – this is where I define a unique logic that must execute every time the contract is involved in an action.
- Personal accounts – personal accounts are where you keep funds for specific purposes, for example savings accounts where money might be transferred at any time.
- Permissions – permission lists can be used to decide who can access sub-contracts or even smart contracts themselves.
- Digital signatures – using digital signatures it is possible to only allow certain people to access sub-contracts or even smart contracts themselves, this can often make security more secure as no one else will have access to the contract apart from the ones you chose to give it to them.
- Counter-parties – the best way to prevent fraudulent transactions is by using counter-parties, this is where one or more parties are able to verify that a given action has taken place.
- Timestamps – holding timestamps can be used to ensure that a specific action occurred between two parties at a specific point in time.
- Merging accounts – this is where you combine two or more accounts into one so it becomes easier to track them at a glance.
- Address book – it’s important to have an address book so you know exactly who your friends and family members are when dealing with contracts and payments, this way they could be trusted to send the money in the right direction without any issues.
Benefits of Using Smart Contracts
In fiat currency systems, smart contracts can help simplify transactions. If one party owes money to another party and doesn’t pay them on time, a smart contract could automatically deduct the amount owed from their card or bank account. Unlike traditional banking systems which might take days or weeks to transfer money between accounts and make payments on a loan, a smart contract could do this in very short order while still maintaining some degree of trust with both parties involved.
Here is an example of an online gambling site using smart contracts. Imagine that you’re playing blackjack. If you have a losing streak, the site will automatically take money from your account faster than usual to prevent you from bankrupting yourself. This way, each player keeps the same balance regardless of their results. It’s even possible for the casino to set limits on how much money can be taken out or put into your account in any given period of time, preventing it from being overdrawn. Of course, the casino doesn’t need to know that you’re using smart contracts; it can just check with the smart contract to see if the player has any outstanding payments.
The real power of smart contracts is when they’re used in cryptocurrency exchanges. Generally speaking, this is because all transactions are verified by computers. The most popular digital currency exchange system, Bitcoin, requires each transaction to be verified by multiple trusted computers before it’s accepted as valid. If one computer breaks its part of the verification process and tries to cheat, all of its peers will reject it and will prevent the transaction from being completed. Bitcoin uses a system called proof of work to verify transactions. But there are other ways to do this as well.
How to Set up a Smart Contract
Now, let’s look at how you can set up smart contracts. If you’d like to use them for an online gambling site for example, you’ll need a little bit of programming experience. For the most part, casinos don’t deal with cryptocurrencies directly; instead, they deal with an exchange that will manage the Bitcoin accounts for players and casino employees alike. So whether you’re a player or a casino employee, you’ll need to set up a Bitcoin wallet which is somewhat similar to setting up a bank account online. You’ll then need to register for a cryptocurrency exchange that acts as a middleman between your Bitcoin wallet and the casino. In fact, this is fairly similar to opening up an account with a bank, except that it’s for cryptocurrency rather than fiat currency. Here’s a list of popular exchanges:
Coinbase – Bitstamp – Poloniex – Kraken – Bittrex
If you have a programming background, it should be fairly easy to set up a smart contract if you use the above-mentioned services. This process may seem complicated at first, but I’ll explain it as best as I can to help people get started. Smart contracts are entered using an Ethereum-enabled programming language, Solidity. Solidity is the most popular smart contract programming language because it was designed by the same person who created Ethereum. If you’re unable to create your own smart contracts, it’s possible to use existing ones that others have already written. You can also buy or sell smart contracts for existing casinos or gambling sites, although Fintalent would recommend trying to set up your own unique one to maximize your profits in the future! Remember, if you’d like to create your own cryptocurrency exchange system using smart contracts, you’ll need to go through several steps. The first one is to open up an Ethereum wallet in which you’ll store your cryptocurrency. The second step is to register for the above-mentioned exchanges so that you can deposit or withdraw your cryptocurrency when necessary. Finally, you’ll set up smart contracts with the casino or gambling site.
Smart contracts are now a necessity especially for firms operating in the tech space as they are huge cost savers and seriously minimize the possibility of frauds. However, they require some level of expertise to set up in order to avoid pitfalls that might lead to costly losses. Fintalent offers business managers a pool of expert Crowdsourcing, Series A and Startup Development Consultants that can help set up your Smart Contracts to meet globally acceptable standards.