We're back, after a very long hiatus. I want to thank you all for the reception this series has gotten, I am truly grateful. We will continue with smart contracts.

Bitcoin’s creation set off a chain reaction of technological advancement in the area of blockchain technology. In such a digital innovation landscape, smart contracts have paved the path for the much-needed evolution of financial systems, redefining the traditional understanding of agreements and transactions. With blockchains being the foundational infrastructure smart contracts are built on, a new era of trust and automation has emerged, with the elimination of intermediaries possibly its most progressive achievement to date. Transacting without the interference of third parties has led to lower costs per transaction and more control has been handed to the users. In this article, we will learn about their mechanisms and applications.

What are Smart Contracts?

A smart contract is a programmable contract that allows two counterparties to set the conditions of a transaction without needing to trust another third party for the execution. Instead of relying on a central system like a bank or customer rep, a program is used to carry out a transaction. Further simplified, computer programs replace human middlemen in the deal between 2 entities.

Let me illustrate this; If Uche wants to create a fund that sends Tsepang $150 on the first day of every month, for the next 6 months, he can program a smart contract with the following steps:

Check the date
If the date is the first of the new month, send $150 to Tsepang.
Repeat steps 1 and 2 till the exhaustion of funds in the smart contract.

Using this simple program, Uche no longer has to go through bankers, agents etc to send the funds to Tsepan automatically. There is also the advantage of transparency in the process being clear to all involved.

From my presentation, we can infer the purpose of smart contracts to be:

Removal of third parties in transactions.
Automation of transaction process.
Improved security of the transaction.
Faster transaction speed.
Enhancing trust between parties, through complete transparency and traceability.
Usage in diverse applications, even beyond finance.

Smart Contract Operations

Smart contracts were first developed and deployed on the Ethereum blockchain, written in the programming language Solidity. The emergence of Ethereum alternatives led to the use of other programming languages such as Rust, Cadence, Vyper etc. Smart contracts are written as scripts that follow an “If this, then that” principle so that whenever a specific condition is fulfilled, the smart contract will carry out the operation as programmed.

To create the decentralized applications, Dapps, we use today, multiple smart contracts are programmed and combined to operate with each other for more complex transactions and operations. Once the smart contracts have been programmed, they are deployed on the blockchain and will self-execute all transactions without intermediaries getting involved. This is possible because the smart contracts are now on the decentralized network run by nodes.

Every transaction done by the smart contract is recorded as a block, thus once the smart contract is deployed, it is immutable (cannot be altered nor changed). The verification process for each transaction depends on the blockchain’s consensus mechanism (read here to learn more about consensus mechanisms). Smart contracts execute predefined actions automatically when specific conditions outlined in the contract are met. In a supply chain, payment might be automatically released once goods are delivered and confirmed by tracking data input into the blockchain. This is a practical example of the execution of operations by smart contracts.

Now, what’s a transaction without fees huh? The nodes which the smart contract is running are very expensive, powerful and energy-consuming machinery which require maintenance. These fees, called “gas fees”, are paid in cryptocurrency and cover the computational resources required to process and validate the transactions within the contract.

Development platforms used to deploy smart contracts increase every day, but the ones used during the foundational years of DeFi are Ethereum, Binance Smart Chain, Solana, Fantom, Polygon, Near etc. Note that some platforms like Binance Smart Chain, Fantom, Avalanche and Polygon all launched platforms on top of the Ethereum blockchain. These platforms are called Ethereum Virtual Machines (EVMs) because they seek to use the benefit of Ethereum’s security while solving the issue of its scalability.

While we mainly use smart contracts for financial operations such as lending, providing liquidity and yield farming, there are other industries where smart contracts can be applied and generate benefits, some of which are:

Supply Chain and Logistics.
Intellectual Property and Royalties.
Voting Systems and Governance.
Healthcare.
SAFE, a digital health and diagnostics platform built on Hedera creates a unique health identifier with a proprietary algorithm. These identifiers don't reference the patient, preserving their privacy.

That’s all for smart contracts. In Part 7 we will get more practical as we learn about decentralized wallets and how to set them up. If you found this educational or helpful, please share this article with your friends, relations and audience.

Thank you and till next time.