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Smart Contracts Explained

Smart Contract may be a snappy name but is not the best explanation of what is going on. The Smart Contract itself is a piece of code that can run in some but not all Blockchain implementations. It does run within Ethereum and in Bitcoin. It allows each block to do more than just hold data and verify the integrity of that data.

The Blockchain contract is an instruction to do something but more in the manner of a machine or computer program than of a business contract. A business contract is  an agreement to do something; parties are bound to the contract with some moral or legal leeway in how it is interpreted.  Legally enforcing a Blockchain Smart Contract is still a grey area.

The Smart Contract is only as smart as the program behind it. In many cases the function is relatively simple; ‘transfer funds from buyer to seller in exchange for something’. The contract will generally be to transfer cryptocurrency from one wallet to another with the expectation of some exchange of goods or provision of services. If the goods themselves are on the Blockchain then the title will change instantly. This would be the case in the purchase of a NFT. The transaction may however involve processes outside the Blockchain such as shipping physical goods or buying or selling shares using the cryptocurrency of the Blockchain. The coin transfer will go ahead, perhaps within parameters set on the program but any elements outside the Blockchain will still rely on trust. The more trade-able items that become represented on the Blockchain the greater the potential of Smart Contracts.

Smart Contracts are deployed onto the Blockchain like any other transaction and remain as immutable blocks. The contract code can call other Smart Contracts and deploy new Smart Contracts. These activities will all incur gas fees on most chains including Ethereum. The code on the Blockchain will be compiled to make it run efficiently but tools are available to decompile this to more easily readable formats. Even so a solid knowledge of computer code is required to attempt to understand what is going on. The majority of Smart Contract users will be unaware of their existence within a cryptocurrency transaction. Over 44 million Smart Contracts have been deployed on Ethereum since its launch. Many have since been destroyed, 10% of the live contracts involve gas payments. The NFT platform OpenSea alone accounts for 1 million Ethereum Smart Contracts.

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