Have you ever won a bet on the big game with a buddy and he backs out by saying, “we never shook on it!” But you know full well he would have taken your money if the result was reversed. Or worse yet, he just doesn’t pay you.
Well… this scenario, and many others, could be avoided by using a smart contract.
The definition of a smart contract is a contract that executes automatically when the terms of the agreement between all parties written into the lines of the code are complete. These transactions are also traceable and irreversible.
For our purposes, a smart contract is coded into a decentralized blockchain network.
A smart contract is the main building block of many decentralized crypto applications… And are the driving force of higher prices in our crypto portfolios.
Building Trust in a Trustless World
Even worse than our deadbeat buddies are people who don’t know us and would gladly run away with our money. But a smart contract allows for a trusted transaction to occur between anonymous parties.
In the case of a bet, two people from around the world could bet on the result of a World Cup match between Brazil and France. They don’t need to know each other… One guy wants to bet on Brazil the other on France. And neither want to pay a fee to a casino or a bookie. These two can get together and write a smart contract. Or when a decentralized exchange like betswap.gg opens, be able to meet there.
The smart contract will then hold the betting money in what is essentially an escrow account. Let’s say we each bet 1 ETH on the game. When the game is over, a service called an “oracle” will put the result of the match into the blockchain. The smart contract will then give 2 ETH to the winner.
And we can trust the contract to execute if we’ve properly written it and it’s written to a secure blockchain like Bitcoin or Ethereum.
A Smart Contract Is For More Than Just Betting
I used this betting example because it’s simple and relatable. But a smart contract is used for many more complex, and useful applications, than sports betting.
A Smart contract could be used to secure the voting system and make it less susceptible to fraud. The last two presidential elections were rife with voter fraud allegations… Coming from both sides of the aisle.
If we had a blockchain based voting system tied in with biometric authentication, we would have a secure, fully verifiable election result. No one could claim they lost because of fraudulent votes.
We don’t have time to read through the hundreds of applications so a few large applications for a smart contract are:
- Decentralized Finance applications
- Loans
- Interest-bearing accounts
- Yield farming (we’ll have guides on this amazing income opportunity in the future)
- Leveraged positions
- Insurance policies
- Lottery system
- Real Estate transaction settlement – this will disrupt the expensive title insurance and escrow businesses
- Land Registry
- Results of a battle within a game… To the victor goes the spoils
Once again, we’re just seeing the tip of the iceberg with these examples. There will be many more.
How A Smart Contract Will Drive Demand For Cryptos
As mentioned above, a smart contract is written in computer code. And for a smart contract to be codified on the blockchain, participants need to pay “gas” to get the code uploaded to the blockchain. It’s important to look at the gas fees on the blockchain before submitting the code.
Sometimes the gas fees go to the node operators that keep the blockchain running eg. miners or stakers. Other times the gas payment gets burnt, reducing the supply of the crypto.
But either way, it costs cryptocurrency to write a smart contract to the blockchain. So if someone wants to write a smart contract to the Ethereum blockchain they will need to buy Ethereum to pay the fees necessary to write the smart contract to the blockchain. And then also to pay the transaction fees for any cryptocurrency that trades hands.
That demand for Ethereum is how smart contracts drive demand for crypto.
The Ethereum blockchain is one of many that support smart contracts. Stay tuned to learn more.
