Smart Contracts can be a term you may hear more often if you are already engaging with the cryptocurrency industry and blockchain system. But do you still have a clear insight into them or their working mechanism? Don’t worry, we will get you covered in this article. Here is all you need to know about Smart Contracts, their features, and their real purpose in a blockchain ecosystem. Understanding these is not just an enhancement of your crypto knowledge base; rather, it is a crucial and inevitable concept to understand even before you kickstart your cryptocurrency investment journey for real. 

What are Smart Contracts?

Contracts can be a term that is quite familiar to you. Most of the formal undertakings and services in and around us are based on such legal contracts. But when it comes to the world of cryptocurrencies, you will not be able to see such legal agreements in the form of contracts. Instead, they appear in the form of Smart Contracts. Here, the agreements are written in the form of tamper-proof codes, and the code will execute itself within the blockchain ecosystem without the need for any external interference, and thus, the trust is maintained. These computer-based digital programs are also known as transaction protocols.

The Working Mechanism of Smart Contracts 

Now that you might have understood that Smart Contracts are codes written using programming languages on a computer. They can be executed or run using 6 steps so that the contract can be implemented smooth and seamlessly. For the customer to have the benefits and features of this particular blockchain technology, Smart Contracts are quite necessary. Apart from that, the transparency, efficiency, and security measures of this network are also carried out through these codes. However, making use of these codes is not something that comes with zero risk. Since the very nature of these codes lies in the programming languages, there is a chance of an external interference, like hacking, that may happen to the network. Now, let’s look at the 6 required steps for the execution of the Smart Contracts.

1. Agreeing to Terms and Conditions 

Smart Contracts are a term of agreement between their users and the management. So, just like the terms and conditions that would be written under any other circumstance, a detailed agreement would also be written, but in programming language. This contract would be visible to the users whenever they are about to sign up for this blockchain network. After reading this, they need to agree to the terms and conditions written by the authorities in order to start transacting inside this ecosystem. Apart from this, it is for both parties to decide the functioning mode of the network; that is, whether it should be automated or not. 

2. Creating A Smart Contract

Creating a smart contract should be done by professionals who have ample experience in this domain. Otherwise, it can easily lead to security flaws in the contracts and other related consequences. The major process in creating a smart contract is nothing but the translation of all the manually written agreements into a computer language. Adding extra security features is quite vital in this step. 

3. The Deployment 

Now that you are ready with the Smart Contract, all that is left to be done is the deployment. The professionals will deploy the contract into the blockchain, and all further transactions happening within the blockchain network will be according to the code written in these smart contracts. While you are transacting using these, you will not be entitled to any refunds, returns, or exchanges within the network. And this is one of the characteristic features of Smart Contracts, and nobody will be exempt from these rules, as the system can only work on the pre-written codes. 

4. Triggering Conditions 

Triggering Conditions are something that is closely associated with the working mechanisms of the smart contracts. Some specified durations, a particular date, time period, transactional limits, etc, belong to the category of triggering conditions. Once the transactions hit these triggering conditions, the smart contracts lead the user or the user account to so-and-so stages. 

5. Execution of the Smart Contracts 

We have already discussed some stages that the smart contracts lead us to when an account hits the triggering conditions. This functioning can be termed as the real execution of the smart contracts. Imagine registering an asset class in the name of the user when the user has completed the purchase and payment protocols; that is where the real execution of the smart contracts takes place. 

6. Recording the transactions

Recording the transactions comes as the last and final step in the working mechanism of a smart contract. Once the execution is done and a particular asset class has been registered with ownership in your name, it should be properly recorded in the blockchain system. This process is carried out in the last step of recording. 

How Smart Contracts Power DeFi, NFTs, and Web3?

The decentralized finance services across the globe require the assistance of Smart Contracts to carry out their functionalities. In this section, we will look into detail how Smart Contracts operate in all three different aspects, viz, DeFi, NFTs, and Web3. 

Smart Contracts and DeFi 

Smart Contracts can work efficiently when it comes to Decentralized Finance (DeFi). Money lending, collateral management, interest rates, and terms and conditions associated with money lending, everything will come under the Smart Contracts deployed in DeFi institutions. In the case of Decentralized Exchanges (DeX), it eliminates the need for an intermediary. Peer-to-peer trading using liquidity pools that are being carried through Automated Market Makers (AMM) can all be powered by Smart Contracts. Granting rewards to those users who hold their crypto assets in the network is also something that can be executed by smart contracts in DeFi platforms. 

Smart Contracts and NFTs 

NFTs cannot function in their full swing without the assistance of these smart contracts. Defining and managing the digital assets can also be carried out through smart contracts. The ownership and trading trajectory will be marked for every NFT, making the transactions transparent and just. Automated royalty granting is a program where the original creator of an NFT will be credited with a small amount of the future sales of the token. Smart Contracts take responsibility for such distributions also, which are characteristic of the NFTs. 

Also Read : Most Expensive NFTs Ever Sold: How Much Are They Worth Now?

Smart Contracts and Web3 

Web3 is one of the most popular internet spaces, where users get the opportunity to control all their data and digital assets. Smart Contracts are the main support system here, creating Decentralized Autonomous Organizations (DAOs) and self-governed Apps. In the case of Decentralized Autonomous Organizations (DAOs), their functionalities are carried out through code written in Smart Contracts, and when it comes to the self-governed apps, the foundational working mechanism is vested with these contracts. 

Conclusion 

Now that you might have earned a comprehensive framework regarding the concept and working mechanism of Smart Contracts. We have also discussed in detail the functionalities of the contract in 6 different steps. Apart from that, the role and relationship of the smart contracts with DeFi, NFTs, and Web3 have also been discussed in the article in a comprehensive manner. Next time, you get to hear about the smart contracts, you know what it is and how they work in a blockchain ecosystem, and what their functions are.