Smart contracts – Simply Explained


Smart contracts (also called distributed apps)
are very popular nowadays.
But what are they and what problems do they
solve?
The term “smart contract” was first used
by Nick Szabo in 1997, long before Bitcoin
was created.
He is a computer scientist, law scholar and
cryptographer so I’ll spare you his exact
words.
But in simple terms: he wanted to use a distributed
ledger to store contracts.
Now, smart contracts are just like contracts
in the real world.
The only difference is that they are completely
digital.
In fact a smart contract is actually a tiny
computer program that is stored inside a blockchain.
Let’s take a look at an example to understand
how smart contracts work.
You probably are familiar with Kickstarter,
the large fundraising platform.
Product teams can go to Kickstarter, create
a project, set a funding goal and start collecting
money from others who believe in the idea.
Kickstarter is essentially a third party that
sits between product teams and supporters.
This means that both of them need to trust
Kickstarter to handle their money correctly.
If the project gets successfully funded, the
project team expects Kickstarter to give them
the money.
On the other hand, supporters want their money
to go to the project if it was funded or to
get a refund when it hasn’t reached its
goals.
Both the product team and its supports have
to trust Kickstarter.
But with smart contracts we can build a similar
system that doesn’t require a third-party
like Kickstarter.
So let’s create a smart contract for this!
We can program the smart contract so that
it holds all the received funds until a certain
goal is reached.
The supporters of a project can now transfer
their money to the smart contract.
If the project gets fully funded, the contract
automatically passes the money to the creator
of the project.
And if the project fails to meet the goal,
the money automatically goes back to the supporters.
Pretty awesome right?
And because smart contracts are stored on
a blockchain, everything is completely distributed.
With this technique, no one is in control
of the money.
But wait a minute!
Why should we trust a smart contract?
Well because smart contracts are stored on
a blockchain, they inherit some interesting
properties.
They are immutable and they are distributed.
Being immutable means that once a smart contract
is created, it can never be changed again.
So no one can go behind your back and tamper
with the code of your contract.
And being distributed means that the output
of your contract is validated by everyone
on the network.
So a single person cannot force the contract
to release the funds because other people
on the network will spot this attempt and
mark it as invalid.
Tampering with smart contracts becomes almost
impossible.
Smart contracts can be applied to many different
things, not just on crowdfunding.
Banks could use it to issue loans or to offer
automatic payments.
Insurance companies could use it to process
certain claims.
Postal companies could use it for payment
on delivery, and so on and so on…
So, now you might wonder where and how you
can use smart contracts.
Right now there are a handful of blockchains
who support smart contracts, but the biggest
one is Ethereum.
It was was specifically created and designed
to support smart contracts.
They can be programmed in a special programming
language called Solidity.
This language was specifically created for
Ethereum and uses a syntax that resembles
Javascript.
Its worth noting that Bitcoin also has support
for smart contracts although it’s a lot
more limited compared to Ethereum.
So now you know what smart contracts are and
what problem they solve.
I hope you enjoyed this video and if you did,
hit the like button and get subscribed.
And as always: thank you very much for watching!
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