What is a Smart Contract?

What is the definition of a smart contract?

When software developers use distributed ledgers to host custom-developed business logic and applications, those applications are often referred to as smart contracts. The phrase “smart contract” may semantically sound narrow in terms of possible use cases. However, the workflows and business processes to which smart contracts are suited are only limited by the innovative imaginations of developers and others who understand the unique value propositions of Distributed Ledger Technology (DLT) and how smart contracts make it possible to programmatically unlock those capabilities. The programmability of smart contracts is what turns DLTs into an incredibly versatile application platform for digital transformation, business innovation and industry disruption.

What is the relevance of smart contracts to blockchain?

Smart contracts add an event-driven programmable dimension to using blockchain and other DLTs. They are essentially the digital, automated versions of normal everyday contracts (analog world contracts) that specify transactional obligations to the involved parties and counterparties (obligations that are often automatically triggered by the satisfaction of one or more conditions). Additionally, the programmability of smart contracts can be leveraged for other blockchain automations such as the the minting and ongoing governance of certain types of tokens (e.g., ERC-20 compliant tokens).

The inherently event-driven nature of smart contract technology to trigger the execution of digital workflows and business logic is key to a smart contract’s ability to address use cases that do more than just mirror real-world contracts. Smart contract technology can be used to address many event-driven business use cases where the other unique value propositions of DLT (beyond its inherently transactional nature) such as decentralized governance, immutability of data and multi-party transparency can play an important role.

Going back to the analog contract context — whereas an analog contract requires the manual interlocution of humans before all parties and counterparties are able to satisfy their contractual obligations — the obligations of any parties and counterparties to a smart contract can be automatically satisfied without human intervention. This is particularly true when the smart contract in question is transactional in nature because DLT is also inherently a transactional technology.

What is the importance of programmability to smart contracts?

By making blockchain and other distributed ledger technology programmable, smart contracts have done for DLT what JavaScript has done for web pages. Before JavaScript, web pages did nothing more than statically render text and images. Even doing something as simple as creating a web page that allowed a user to add two numbers together was impossible. Today, doing so is a trivial piece of JavaScript programming. It’s small potatoes, something an elementary school student can do. But JavaScript goes beyond the trivial. Look under the covers of every modern web page, from Amazon to Facebook, and you’ll find a layer of complex JavaScript powering most of the web’s dynamic interactivity. Even the user interface of BlockchainJournal.com, which will become increasingly interactive over time, is built with sophisticated JavaScript frameworks such as React and Gatsby.

Just as JavaScript changed the nature and scope of developing on the web, smart contracts have also changed the way organizations and people use DLTs. For example, the retail giant Walmart uses DLT-enabled smart contracts to execute supply chain tracking of goods from farms and assembly lines throughout the world to the stores in which the end products are sold. Insurance companies such as Insurwave use smart contract technology to capture and execute the business logic for its policy administration processes. These are just a few examples.

What is the relevance of smart contracts to decentralized exchanges?

Smart contracts are also the key to the operation of decentralized exchanges (DEX). One of the core tenets of a DEX is the disintermediation of human involvement or decision making as a part of the business process of exchanging one currency for another. The entire process is handled algorithmically by the business logic found in the DEX’s smart contract. When currencies are swapped for one another, they are referred to as a trading pair. Not only do many DEXes use smart contracts to facilitate user access to trading pairs, they use smart contracts to facilitate end-user creation of those trading pairs.