What is a Smart Contract in Blockchain and How Does it Work?

Some believe crypto money or cryptocurrency to be part of the future. According to Rutskiy et al. (2021), the second most valuable crypto coin with the most market capitalization in the cryptocurrency industry today is Ethereum.

Ethereum is a Blockchain-based crypto coin that focuses on innovative contract technology and a programming language for decentralized applications (D’Apps).

A smart contract itself is a designation for a programmed contract where each agreement is recorded in computer code on the Blockchain.

So when a condition stated in the contract is met, the smart contract will automatically carry out orders to transfer Ethereum tokens or other transactions.

Intro to Smart Contract

This intelligent contract, or smart contract, was created in 1994 by a cryptographer, Nick Szabo.

At first, the smart contract itself was created by Nick Szabo when he was using a smart contract to record contracts in computer code form. This contract will be automatically active later if the conditions stated or written in it have been fulfilled.

Nick Szabo himself created this smart contract himself. It aims to process transactions that can be carried out directly without the presence of third parties, such as lawyers, banks, or other intermediaries.

The intelligent or smart contract itself will be executed automatically through a trusted network and is fully controlled by a computer.

As the originator of this smart contract, Nick Szabo also created a book titled “Smart Contracts: Building Blocks for Digital Free Markets”. In that book, he discussed and put down the initial idea of how the smart contract could be made by him.

15 years later, in 2009, Bitcoin also introduced Blockchain technology. Blockchain technology was introduced for the first time by Satoshi Nakamoto, the originator of Bitcoin, whose true identity is still unknown to the public.

Then the existing blockchain technology was then utilized by Vitalik Buterin, a young genius, to realize the smart contracts that exist today. This is done so that existing intelligent contracts can be applied and used to solve various problems that exist in the real world.

And in 2015, a smart contract with all its advantages was also introduced by Ethereum.

How Does Smart Contract Workks?

To be easily understood, the following is a simple illustration of how existing intelligent contracts work.

One day, two people were going to process a house sale and purchase transaction. The two parties then use the smart contract on the Ethereum blockchain to make a marketing agreement.

The smart contract that has been made contains the agreement that both parties previously made in this house’s sale and purchase transaction.

The contents of the existing agreement are simple, as follows.

“When the buyer has paid the seller 300 Ether, that’s when the buyer will receive ownership rights to the house that has become an agreement.:

Based on the contents of the smart contract that was previously created on the Ethereum blockchain, the buyer can receive the house he wants to buy from the seller after paying 300 Ether to the seller.

Contracts that have been made by themselves can no longer be changed. So that intelligent contracts whose conditions have been met will be automatically processed.

This smart contract is straightforward for both parties because it does not require third parties such as brokers, banks, or the government to process transactions.

The existence of this blockchain technology itself also makes the transaction process carried out run safely because it is processed automatically.

Intelligent or smart contracts that exist alone can run independently or with other smart contracts. Suppose an intelligent contract is executed simultaneously with other smart contracts. In that case, it will bring up various other arrangements related to the agreement.

Decentralized Smart Contract

Smart contracts also have a decentralized nature, which means that smart contracts have a more straightforward process, and an agreement can work without intermediaries or third parties involved.

Some people who implement smart contracts also often add a signature component, where the parties involved must sign a document before completing the existing agreement. That way, the risk of fraud is also getting smaller.

After the existing contract is signed by both parties, the contract will then be monitored via a computer with a blockchain system, which is safe and challenging for hackers to hack.

Contracts carried out electronically also have laws that protect them, which are further discussed in the book Electronic Contract Law E-Contract Law.

Types of Smart Contract

If distinguished by type, there are two types of smart contracts, which are determined based on the availability of the necessary conditions.

1. Deterministic Smart Contract

The first type of smart contract is a deterministic smart contract, where you can have all the information you want through the blockchain it runs.

The information available itself can vary. It can be in the form of specific transactions, execution of other contracts, high blocks, or various other things as long as this information can be found in the blockchain.

Examples of implementing this type of intelligent contract itself are crypto tokens, lotteries, and share ownership.

2. Non-Deterministic Smart Contract

The second type of smart contract, which is a non-deterministic smart contract, is a contract that requires information external to the blockchain.

This makes this contract require someone’s intervention and a factor of luck that cannot be obtained from a computer. This information can be obtained from various things, such as weather reports, election results, or sports match results.

These non-deterministic smart contracts also require their users to believe in predictions, which is a missing link between the blockchain and the real world.

Advantages of Smart Contract

Here are the advantages of smart contract:

1. Autonomy

The first advantage that comes from using smart contracts is autonomy. Where by using a smart contract, you no longer need to use the services of a third party and can get complete control over an agreement that has been made.

2. Trust

The second advantage that comes from using smart contracts is trust. Using an intelligent agreement means you don’t need to be afraid of losing essential documents because all the records are already stored in the existing system.

In addition, you don’t need to be scared to choose a third party which often creates trust issues.

3. Economical

The third advantage you get from using smart contracts is that they are economical or economical. Using an intelligent agreement means you no longer need to pay fees to third parties, such as property agents or notaries, when making transactions.

The process generally carried out alone with the involvement of a third party, such as an Islamic bank, in buying a product can also be found in Grameds’ discussion in the book How To Design a Sharia Contract.

4. Security

The fourth advantage that comes from using smart contracts is security. The agreement will be difficult to hack by using a smart contract created and implemented correctly. In addition, smart contracts are generally protected with complex cryptography, making them more secure.

5. Efficiency

The fifth advantage that comes from using smart contracts is efficiency. Where using a smart contract can simplify all matters or agreements that are made. This is because you no longer need to take care of various physical documents, which often take time.

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