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What are smart contracts?

They automatically verify, execute, and enforce the contract based on the terms written in the code. Smart contracts can be partially or fully self-executing and self-enforcing. They can be used to exchange anything of value.

When a smart contract is run on the blockchain, it operates automatically. If the conditions of a contract are met, payments or value are exchanged based on the terms of the contract. If conditions in the contract are not met, payments may be withheld if written into the smart contract.

Right now, there is a handful of blockchains which support smart contract, but the biggest one is Ethereum. It was specifically created and designed to support smart contracts.

What is Ethereum?

Ethereum is a blockchain with a programming language that allows applications referred to as decentralized applications or dApps and smart contracts to run on top of the underlying blockchain.

This allows developers to create programs that run on a blockchain and use the computing power of thousands of computers connected to the blockchain network.

Ethereum was created in 2013 by Vitalik Buterin, when he proposed that instead of using the blockchain only as a currency, its functions can be extended in the direction of a decentralized supercomputer.

The Ethereum network uses the cryptocurrency Ether, which acts as the currency on the network. Ether is exchanged as payment for running decentralized applications on the network. Ether is the second largest cryptocurrency by market cap after Bitcoin.

The Ethereum platform also has the Ethereum Virtual Machine (we can perceive it as an Ethereum operating system) and Solidity programming language. Solidity can be used to create dApps or smart contracts that are compiled by the Ethereum Virtual Machine and run on the blockchain.

Why can we consider smart contracts trustworthy?

Because smart contracts are stored on a blockchain, they inherit some interesting properties. They are immutable and they are distributed.

Being immutable means that once a smart contract is created, it can never be changed again. So, no one can go behind your back and tamper with the code of the contract.

And being distributed means that the output of the contract is validated by everyone on the network. So, a single person cannot force the contract to release the funds because other people on the network will spot this attempt and mark it as invalid. Tampering with smart contracts becomes almost impossible.

Smart contracts run as they are programmed on a decentralized network of computers on the blockchain removing risks around unauthorized changes, fraud, server failure or non-compliance with the terms of the contract. The blockchain network also removes the need for third-party intermediaries for managing the contract.

How can smart contracts be used?

Smart contracts have the potential to be used in various areas. They can be used for anything of value that can be exchanged, and there are a lot of companies developing blockchain-based decentralized applications that utilize smart contracts.

One of the ways to use smart contracts is the so-called crowdfunding, which is a method of raising funds for various projects or start-ups through crypto. We can program the smart contract so that it holds all the received funds until a certain goal is reached. The supporters of the project can then transfer their money to the smart contract. If the project gets fully funded, the contract automatically passes the money to the creator of the project. And if the project fails to meet the goal, the money automatically goes back to the supporters. And because smart contracts are stored inside a blockchain, everything is completely distributed.

Smart contract can be applied to many different things, not just on crowdfunding. Banks for example could use it to issue loans or to offer automatic payments. Insurance companies could use it to process certain claims. And postal companies could use it for payment on delivery. These are just a few examples, but the potential for the future is huge.

A specific type of smart contracts that work on Ethereum blockchain are the so-called Ethereum tokens.

Many decentralized Ethereum-based applications have their own cryptocurrencies called "tokens." To interact with decentralized applications, you must purchase a native token of such an application in order to use the services. Generally speaking, a token represents the value of something specific in a given ecosystem. It can be economic value, dividend, share, voting rights, etc.

Tokens allow developers and organizations to create applications running on a blockchain without having to build and maintain their own blockchain or cryptocurrency.