You are currently viewing Smart Contracts: What Are They and How Do They Work?  |  by Alpyne Labs |  Coinmonks |  Sep 2022

Smart Contracts: What Are They and How Do They Work? | by Alpyne Labs | Coinmonks | Sep 2022

We’re sure you have heard about smart contracts and blockchain technology, along with all the ways that you can incorporate them into your business model. Over the past 2 years, blockchain technology has been adopted at an extraordinarily rapid pace with $6.6 billion in spending in 2021, and expectations of that to be almost double that at the close of 2022.

But, at the center of many of the existing and potential use cases sits a pillar of blockchain technology that is often misunderstood: smart contracts.

Smart contracts are pieces of on-chain code that are designed to automatically execute a set of instructions once certain conditions are met. The code and the agreements contained therein exist across a distributed, decentralized network.

Sounds cool. But what does that mean?

A clear and easy way to understand the functionality of a smart contract is to compare it to a vending machine. Most likely you know how a vending machine works, but let’s break it down step-by-step to make it easier to explain.

When you use a vending machine, you look at the options and decide that you want a candy bar. For the sake of this example, let’s say that you want to buy a Snickers bar for the price of $1.00. You insert $1 into the machine, press the corresponding number to the Snickers bar, and the delicious treat is released to you by the machine.

What the user doesn’t see is the inner workings of the vending machine. Inside the machine, there is a computer chip that is programmed to know how much each item costs. When a user inserts money and selects an item, the machine knows whether or not it has met the requirements (enough money was inserted) for that item — in this example, the Snickers bar. If the conditions are met, the machine then keeps the money inserted and dispenses the Snickers bar. To sum it up, this functionality is pre-built into the vending machine and automatically executes when certain criteria are met — in this case, paying $1.

Smart contracts work very much the same way. The smart contract itself is similar to the programming of the computer chip that lives inside the vending machine. Except, in this case, the program (the smart contract) is coded onto the blockchain. More about the advantages of the blockchain in a minute.

This works exactly like the vending machine example. On an NFT marketplace like OpenSea, users can list their NFTs for sale for a certain price. This is done via the Seaport smart contract. Then, when a buyer decides they want to purchase that listed NFT, they send the designated amount of crypto to the smart contract and the NFT is delivered to their wallet automatically. Just like buying a candy bar from a vending machine, the entire transaction takes place without anyone needing to interfere.

The end product of a smart contract is quite simple and makes it easy for the users to interact with the blockchain, especially if it is a well-written one. And you can choose to build smart contracts on any blockchain that supports them. Each blockchain carries different advantages but here is a list of the most popular ones, and they are linked to resources on how to build on each:

So, now you get the gist of what smart contracts are, but you may be wanting to know the why behind smart contracts. Well, smart contracts living on the blockchain bring several advantages.

  • Automation: once the smart contract is, it runs autonomously. Just like a vending machine, it will live on its own and function as it was programmed without any interference. Automating processes and transactions hold large benefits in many business use cases.
  • Cost: Without the need for third-party intermediaries, transaction costs can be much lower with smart contracts than with traditional payment methods.
  • Decentralization: Blockchains are maintained by large networks of computers (more on how they work here). This means that a smart contract that is coded onto a blockchain exists independent of a centralized database such as AWS or Google Cloud. This means that no centralized entity can adjust the contract, delete it, or prevent it from executing. Just like the vending machine that stands alone in a building and operates independently, a smart contract, once coded onto the blockchain, will operate freely within its given parameters.
  • Permissionless: this means anyone can interact with a smart contract without the contract being monitored. If the user fulfills the necessary rules (puts in the correct amount of money), then the smart contract will execute (distribute the candy bar). Once the smart contract is up and running, there is no ‘overseer’ that can censor it or prevent someone from accessing it.
  • Composability: you can call other smart contracts in your smart contract. Like an awesome set of digital legos, you can put the functions of different smart contracts together. This allows for several smart contract calls to happen in the backend of an dapp or platform. This means that an end user could potentially reap the benefits of multiple smart contracts by only interacting with one user interface. Think of this like a large grocery store. The grocery store sells both fresh produce and fresh meat. Instead of going to a vegetable stand for your product and then a butcher for your meat, you can go to one grocery store to get everything. Composibility!

There are TONS of resources online that help developers of all levels and experiences learn about smart contracts and start creating their own. There are even emerging startups that enable no-code smart contract building, to make it even easier to tap the benefits of the blockchain.

Example of smart contract code from ResearchGate

Here is a list of some resources that will be helpful:

Smart contracts hold a lot of value, but also they live on the blockchain which can sometimes be a bit challenging to access from the traditional financial system. Smart contracts are here to stay and will only continue to become more innovative as time passes. We have only scratched the surface of their potential, so now is the perfect time to start building your own.

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