Business

Learn the basics of smart contracts and how they work

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Cointelegraph’s Jackson DuMont looks at smart contracts in the latest episode of Cryptopedia. He explains how smart contracts work from the ground up and gives examples of how they can be used in real-world scenarios.

DuMont describes smart contracts as code within the blockchain that “executes when certain conditions are met.” They are self-executing contracts based on blockchain technology that have the power to complete transactions without an intermediary.

As an example, DuMont explained the difference between transactions on a centralized exchange like Binance and the same transactions on a decentralized exchange (DEX) like Uniswap, which is based on smart contracts.

Binance requires a user to believe that Binance will complete their transaction and the execution of the transaction depends on the user’s trust in the third party, which in this case is Binance. On the other hand, DuMont explains:

“Smart contracts eliminate the need for a middleman because they run on a decentralized blockchain network rather than on an enterprise server.”

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This means that the chances of a smart contract being executed are higher since the network is not controlled by a single entity. Instead, a blockchain network is run by various anonymous nodes distributed around the world.

“If you want to interact with someone else via a smart contract, you don’t need to know who they are. You don’t even have to trust them.”

Simply put, nodes are tiny servers that constantly ping each other to ensure data is coherent with each other within the blockchain. This includes smart contracts that are “replicated and distributed to all nodes in the network,” explained DuMont.

Finally, DuMont explains that there are many use cases for smart contracts in different sectors such as investing, gaming, voting, crowdfunding payments, insurance, and more. DuMont notes that smart contract applications are only limited by people’s creativity.