What Are Smart Contracts And dApps — A Beginners Guide

in #blockchain6 years ago

This is the 4th article in the series of — How to Find Your Next Cryptocurrency Investment?

What is smart contract? This is a computer system that digitally verify, controls and facilitates the digital assets or currencies between the parties during the performance of the contract. It facilitates safety and allows no third party to intervene, this means that the system is secure from any fraud or criminal acts.

The transactions conducted under smart contracts are irreversible and trackable. A smart contract is smart as the name suggests, it is able to define penalties and rules that are associated with the agreement which is same as how the traditional contracts work. It can also enforce the obligations in the agreement automatically, which is the work of this digital system.

How did Smart Contract come to the crypto world?

The first person to propose on smart contract idea was Nick Szabo who was a computer scientist, he coined the proposal back in 1994. The aim of bringing up smart contract was to provide security and reduce the transaction costs that come along with the contract. So far several cryptocurrencies have been able to implement various smart contracts. The word “Smart Contracts” was published after Nick Szabo reworked over the project over and over again until it was brought to use. It was documented as “formalizing and securing Relationship on Public Networks” this document was used to describe how business-related operations and contract law could become possible to establish through electronic commerce.

How Smart Contract works?

The first cryptocurrency to support smart contracts was Bitcoin, the systems are made in such a way that it transfers value from one party to another. This network only nodes the validate transactions when specific conditions are met. Ethereum works more differently from other cryptocurrencies that use smart contract in such a way that it is able to give the user an opportunity to write their preferred program. You may not get a clear explanation concerning smart contracts, they are difficult to understand because this term at times confuses the interaction described.

The major work of smart contracts is to execute as it has been designed to do. The following are some of the things that smart contract can do;

  • It provides utility to any other contracts.
  • Managing agreements between the parties, it is able to prevent intervention from a third party
  • It is a store of information concerning an application for example domain registration or even membership records
  • It functions as a multi-signature account; these means that funds can only be spent when a required percentage of
    persons agree.

Smart Contracts on Ethereum

To start with it is important to know what is Ethereum and how does is it concerned with smart contracts. What exactly is Ethereum? This is a question that most people have been asking themselves, it might be a little bit hard to understand for a beginner who have no any concept of this major word used in the crypto history. Ethereum is a Blockchain designed system, meaning that it is a decentralized platform that cannot execute a centralized machine. Ethereum stores all data for any transaction of their involved networks. The Ethereum network contains millions of transactions which are grouped to create a block, each block is attached to the previous block building up a continuous Blockchain. Before any transaction is added to the block, it is validated and have to pass through a mining process which is meant to prove the transaction.

Remember that smart contracts facilitate securing a contract, this is how it works on Ethereum. Ethereum is a secure cryptocurrency where no third party can be able to interrupt the contract, the users of Ethereum are luckier since they are able to access to their own application by the help of smart contract.

Smart contracts and dApps should have a distinct difference in order to secure this network. If a mistake on smart contract is made, millions of money can be stolen or lost to an irretrievable place. According to the experts, smart contracts should use a scripting language that can be easily verified, validated and code reviewed. With such an upgrade, the risk of smart contract vulnerability will be reduced. Smart contracts enable one to exchange money or valuable assets such as Ethereum in a transparency way avoiding any interruption from a third party.

What are dApps?

What are dApps? To start with, dApps stands for decentralized applications, as the word suggests, these are decentralized apps that cannot execute on a centralized machine. Smart contracts and dApps on today’s Ethereum network are said to have no difference though according to the definition of smart contracts it shows that the two are two different things. It is said that smart contracts allow dApps to connect to the Blockchain technology.Decentralized applications are known as the fourth stage for the evolution of applications. Dapps was brought to light by Ethereum.

Applications and use cases

#1 Financial information recording
In financial institutions, smart contracts provide transparency and accuracy in the data recording concerning any financial information. This helps in reducing auditing cost as well as improving financial reports, smart contracts also allow uniformity on the financial data.

#2 Securities
Smart contracts provide security to your system, remember that with smart contracts there is no interruption form the third part.

#3 Digital identity
Smart contracts allow a person to control and own his or her own digital identity that contains data. It gives a person to choose the data that should be disclosed to the counterparties enabling the enterprise to know about their customers.

#4 Insurance policies
Did you know that the claim process can take more than a month to get paid? This is clear that the process has not been able to get an update of the digital technology, it shows that manual operations are still used slowing the process down. This can be changed by writing all the policies on smart contracts making the process accurate and fast.

#5 Copyright content
The issue with copyright is knowing the who owns the rights to a certain music when it comes to payment. By the use of smart contracts based on Blockchain, the rightful owner can be identified easily.

Final Words


With a smart contract, it is possible to keep everything in line and making sure that all terms and conditions of an agreement are kept. Remember this is through automation and without meeting the rules enforced smart contract system will be able to prevent any further operation which is a way of preventing fraud.

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The next article in this series will be on — Blockchain As Service

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This article was originally published on CoinSwitch Blog