Smart Contracts Explained
Smart Contracts ExplainedOn November 12, 2022 by admin
If you click around the internet, most explanations of smart contracts use complex jargon leaving you…
In reality, understanding the functions of smart contracts is actually pretty simple when it’s properly explained.
This article will simplify smart contracts for you, and show you how they work– but also how they will transform the gaming industry.
What is a Smart Contract?
Like regular contracts, smart contracts hold terms and conditions. But they differ because they’re digital, and execute automatically once certain conditions are met.
Smart contracts are computer codes, and they exist on the blockchain– a shared public record. The rules of the contract are visible to everyone and cannot be changed.
In many industries, smart contracts streamline the execution of an agreement— saving time, money and hassle. They’re more efficient because they remove the need to trust any party to follow through on their end of the deal.
This is where the term “trustless transactions” comes from.
The idea of a smart contract can be broken down into a few steps:
1. First, a smart contract needs an agreement between two or more parties.
2. The parties can agree on terms which, upon execution, will complete the smart contract.
3. The decision would be written into the smart contract, which is then encrypted and stored in a blockchain network.
4. Once the contract is complete, the transaction is recorded on the blockchain.
5. Now, with a blockchain verifying the smart contract, anyone can confirm its authenticity.
Where Did Smart Contracts Come From?
Smart contracts have been around since the 90’s…
Writing in 1994, the computer scientist Nick Szabo defined a smart contract:
“I call these new contracts “smart”, because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises” ~ Nick Szabo
Ok – so Nick was clearly way ahead of his time. But tell me…
How Do Smart Contracts Work?
To understand how smart contracts work, think of a vending machine…
Vending machines execute automatically once certain conditions are met – and they don’t require another human, just you and the machine.
You select a product, insert the correct amount, the vending machine verifies you have inserted the correct amount…
Then dispenses the product of choice.
If the required conditions aren’t met– i.e. you don’t insert enough money, the vending machine will not execute.
Smart contracts work the same way.
They automatically execute on the terms of the contract once certain criteria are met.
This is what makes it “smarter” than a pen and paper contract.
A smart contract works like this:
If X happens, it triggers Y.
For example, here’s how a smart contract could speed up the process of buying a home…
Let’s say you and the seller agree to a smart contract that states:
IF the X party transfers the property deed to [your name]… THEN [you] will release the agreed sum of money to their bank account.
How does the smart contract know when the deed is transferred?
Imagine if the deed was “tokenized”…
If the deed was a token, the seller could transfer it to your crypto wallet, and poof! You’d be the legal homeowner.
The smart contract could then confirm the conditions were met…
Then transfer the agreed funds to the seller’s bank account.
This is one of the many ways smart contracts could streamline complex processes like buying a home in the future.
Here are some more benefits of smart contracts…
Benefits of Smart Contracts
Greater Trust and Transparency
Any party can view the terms and conditions written in a smart contract since they exist on a blockchain— an immutable public ledger.
This level of transparency will create greater trust between organizations and users (like in the gaming industry), or any group of parties.
At the same time, smart contracts remove the need for trust— since they don’t rely on humans to execute their rules.
Because of this, they can often eliminate the middleman, streamline processes, save delays, hassles, and misinterpretations that normally happen with pen-and-paper contracts.
Remember when I said smart contracts are on a shared public ledger? This means by nature, their contents are duplicated many times across different “nodes.”
This allows originals to be restored in the event of a data loss.
Their contents can be secured through cryptography— allowing you to create private smart contracts on top of public blockchains.
Smart contracts are also secure by design— in metaverse gaming for instance.
No one can steal your virtual items unless they satisfy certain conditions since everything is secured by smart contracts.
Don’t forget – smart contracts can save time, money & hassle…
The mortgage industry is a perfect example.
This industry is currently bloated with costly third parties and time-consuming processes…
Smart contracts can ensure that lenders and loan seekers agree to clear terms and conditions, like proof-of-funds and payment planning.
This emerging technology can validate mortgage transactions without the need for any lawyers or other third parties.
Gaming and NFTs
Smart contacts make all the advertised benefits of web3 games possible– like making money playing games…
Owning game assets…
In a game development team, developers can release their latest plans and modules on smart contracts that gamers can check at any time.
This can help avoid the trust issues between gamers and game developers.
Gamers can also get the exact information of other players with a simple search. Transparent information will improve the relationship between all gamers.
Gaming and NFTs use smart contracts for tamper-proof execution of in-game actions
What’s that mean?
Smart contracts are their own “safety.” If there’s pre-written rules in a code, it prevents certain actions from taking place.
Just like a vending machine won’t work if you don’t insert the correct amount of cash…
Hackers can’t tamper with in-game actions (like cloning tokens) in these video games…
Because the game is coded using smart contracts– so they must follow the rules.
This creates secure games– which is very important in a future where real money will flow through these virtual worlds.
Other Use Cases of Smart Contracts
Protection of Copyrighted Works
Innovators, experts, and designers have had problems with theft of their intellectual property ever since the digital era started.
Blockchain-based smart contracts employ non-fungible tokens (NFTs) to solve this.
These tokens act as a proof-of-ownership of original digital objects.
In web3 gaming, we need a way to protect unique avatars and graphical designs that we earn during gameplay and possess monetary value.
Smart contracts in web3 gaming govern the ownership and transfer functions according to the rules of the game. They ensure that entitlement records can not be tempered at any cost.
Code of conduct for exchanging NFTs
Smart contracts act as a rulebook for the metaverse ecosystem where a huge number of gamers will enter and exit each day.
The main “draw” of a metaverse game will be the ability to earn real-world money— a use case of NFTs.
Smart contracts allow gamers to create, store and transfer NFTs in lieu of something of equal or greater value.
Limitations of Smart Contracts
Smart Contracts Are Usually Coded By Hand
Since smart contracts are coded by people, human error is still possible— which is why it’s important to use best practices followed by leading organizations when creating smart contracts.
Transaction Times Vary
Depending on how much activity is happening on the blockchain, times for peer-to-peer transactions may vary— from minutes to hours.
But compared to the multiple days it normally takes for traditional financial transactions, this isn’t bad. The recent Ethereum merge improved this even more.
Smart Contracts Can’t Acquire Information About “Real-World” Events
This is by design. Using external data could jeopardize consensus, which is critical for security and decentralization.
The Future Of Smart Contracts
Smart contracts can provide people new possibilities to make money in the digital world— as well as new methods to enjoy, trade, acquire, and socialize.
Although smart contracts are still in their infant stages, they will be the building block at the foundation of the future gaming industry.
By integrating the vivid environments of VR, top tier gameplay, social media, and other elements, gaming smart contracts will play a critical role in onboarding the world to web3.