WTF are Smart Contracts?

Tech people: "They are the backbone of Blockchain"

Me: "But WTF are they? Why do we need Smart Contracts?"

Smart Contracts 101: simplified explanation 👇🧵

Disclaimer:

If you know already what Blockchain is, then feel free to keep reading.

If not, then read this thread first on Blockchain 101 👇


0. What are Smart Contracts?

The easiest explanation is:

Smart Contracts are simply a few lines of code instructed to run a set of commands according to agreed conditions between two parties.

Instead of being physical contracts, they are digital and live in the Blockchain ..⬇️

1. But why do we need something this complex?

👉 To build trust, save money and speed up processes

Let's see the following eg:

Imagine the Manchester United will play against Real Madrid for the Champions League Final.

"Damn, what a game. I'll bet on Cristiano Ronaldo" ...⬇️

2. The best Use Case

You jump into your bets website account and bet $10 against Real Madrid.

. If Real Madrid wins, you lose the money
. If Manchester United wins, you'll make $100

But, have you seen what happened behind the scenes? ...⬇️

3. Behind the scenes

What happened was that you relied the Bookmaker to be the trustee of your money.

The moment you click "Place Bet", your money is transferred from your account to the Bookmaker's account until the end of the game.

But why is this a problem? ...⬇️

4. The problem

1. we have to trust the Bookmaker to keep our money while the game is running, and to pay us according to the final result

2. Payment takes 1-3 days and most of the time we cannot get the money directly into our accounts

3. betting has costs

Wait a second ...⬇️

5. Understanding the problem

"Is this Bookmaker trustworthy?
Why wait 1-3 days to withdraw my money?"

The solution:

You'll have to rely on the Bookmaker's reputation and use PayPal to withdraw your money.

But, reputation? Hmm, I remember the 2008 financial crisis ...⬇️

6. Trust, costs and speed

Trusting our money to someone based on reputation became harder after the 2008 crisis.

"Then, how can I trust my money to someone and be sure I'll get it back? What's the cost? How fast will I get it back?"

This is where Smart Contracts come in ...⬇️

7. The solution

Smart Contracts were created to mediate an agreement between parties.

How?

By being a few lines of code that enforce the agreement automatically whenever the conditions are met.

But is it all about bets?

Not really ..⬇️

8. New Use Cases

"So what can we do with Smart Contracts other than placing bets?"

Some new use cases are:

• Voting
• Trading stocks
• Buying insurance
• Buying a new house
• Act as a trustworthy escrow
• Enforcing contracts between suppliers

Wrap up ...⬇️

9. Wrapping up

Smart Contracts are a few lines of code that run automatically whenever the conditions of an agreement are met.

It's cheaper and faster than conventional solutions like: notaries, banks, lawyers, etc.

As it works on top of the Blockchain ...⬇️

... it is completely digital and decentralized.

Why is this nice?

Mainly because nobody will be able to change the initial agreement.

You won't suffer from contract tampering again.

But how are Smart Contracts being applied?

And that, that's the topic for our next thread....

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TL;DR:

0. What are Smart Contracts?
1. But why do we need something this complex?
2. The best Use Case
3. Behind the scenes
4. The problem
5. Understanding the problem
6. Trust, costs and speed
7. The solution
8. New Use Cases
9. Wrapping up