Way back in 1994, a guy named Nick Szabo who was a cryptographer at the time, came up with the idea of being able to record contracts in the form of computer code. The contract would be activated automatically, when certain conditions are met. If they weren’t met then the contract wouldn’t be completed. With this idea, you could potentially remove the need for trusted third-party companies, like the ones we know today such as banks.
Why? The answer is simple, because you no longer need a trusted third party when you make a transaction. No middle men, no taking a cut of the transaction. Instead, the contracts and transactions are self-executed on a trusted network that is completely controlled by computers. Removing the need for humans and extra cost.
Nick Szabo worked on this idea for many years and even wrote a book called “Smart Contracts: Building Blocks for Digital Free Markets“.
So, Just How Do Smart Contracts Work Then?
We can start by looking at how a smart contract can be used:
Say you want to buy a house. This agreement is formed on the Ethereum blockchain using a smart contract, and this contract contains an agreement between both parties.
In the simplest terms, the agreement will look like this: “When party A pays party B – in this case 3000 Ether, it’s then party A receives ownership of the house”.
Once this smart contract agreement has been put into place, it cannot be changed — meaning party A can feel safe to pay party B 3000 Ether for the house.
Without the use of a smart contract in this scenario, Party A and Party B would have to pay fees to third-party companies do something that can be automated and done faster with smart contracts. This Includes banks, lawyers, and a house broker.
Everyone wants no more commissions or delays waiting for lawyers and brokers to process the agreement.
Smart contracts are automatically executed once the conditions of the agreement are met. This means there is no need for a third party, like a bank, a broker or a government.
So What Are Smart Contracts Currently Being Used For?
A house sale is not the only scenario in which smart contracts can be used. Smart contacts can be used for any type of transaction, it doesn’t have to be financial.
The possibilities are endless for smart contracts. They are already being used for financial trades and services, insurance, credit authorization, legal processes and even for crowdfunding agreements ICOs.
For governments, smart contracts running on the blockchain can make voting systems completely trust less and much more secure.
A secure and transparent online solution Follow my vote
Voting applications that use smart contracts and blockchain technology to protect votes from fraud. When the voting transaction is written to the blockchain, it cannot be changed. When the voting is over, the smart contract will send a token to an address that represents the winner of the vote.
This way, voting is always fair, meaning the winner is always correct. How many things can you say that about?
If you want to start your own project that uses the blockchain, you can build your project on the Ethereum blockchain, as we saw earlier. However, you’re going to need some money!
How’re you going to get the money you need? Welcome to ICOS.
An ICO (Initial Coin Offering) is a crowdfunding system for new applications that use blockchain technology. You create a smart contract and a token for that smart contract. Let’s imagine you call your token VDGC
You want to raise $8,000,000 to start your project and build your application, let’s imagine that $8,000,000 is equal to 10,000 Ether. You decide you’re going to put 100,000 VDGC tokens into the smart contract, and that each ABC token is going to be worth 0.1 Ether.
That way, if you sell all 100,000 VDGC tokens, you will have the 10,000 Ether that you need, because of 100,000 x 0.1 = 10,000.
Now, in the smart contract, you will write something like: IF 0.1 ETH is sent to the smart contract, THEN the smart contract will send 1 VDGV to the address that sends the 0.1 ETH. That way, the people contributing to the ICO always get the right amount of VDGC tokens.
Why would people want to buy the VDGC token?
Some of the most common reasons people buy tokens from ICOs are:
The token can be used on the application once it is built
The price of the token may increase when the project becomes more popular
You can think of ICOs as a blockchain version of Kickstarter, with the key difference is that it automates the whole crowdsale process in a secure, trustless way.