In today's world, with the advancement of digital technologies, many of the daily activities of people have moved to the virtual world. Among these, blockchain technology and smart contracts are recognized as one of the most important and innovative digital tools with the potential to create fundamental changes in many industries. In this article, we will introduce smart contracts, how they work, and their applications in today's world.

What is a Smart Contract?

A smart contract is a digital protocol designed to facilitate, verify, and execute contracts automatically without the need for intermediaries. These contracts are executed on the blockchain, providing security, transparency, and immutability. Smart contracts are generally implemented on blockchain platforms like Ethereum, which also allow the execution of decentralized applications (DApps).

How Smart Contracts Work

Smart contracts are essentially codes stored on the blockchain network that automatically review and execute the terms of the contract. These codes typically include a set of predefined rules and conditions that, when met, automatically trigger the related contract operations. For example, in a smart contract for buying and selling goods, once the buyer transfers the agreed amount to the seller's account, the smart contract automatically transfers ownership of the goods to the buyer.

History of Smart Contracts

The idea of smart contracts was first proposed in 1994 by Nick Szabo, a computer scientist and cryptography expert. Szabo used this concept to attempt to extend electronic payment methods, such as point-of-sale (POS) systems, to the digital world, enabling the automatic and intermediary-free execution of contracts.

At that time, digital currencies did not exist in their current form, but Szabo predicted that smart contracts could be used to manage synthetic assets like bonds or in derivatives markets. His idea was based on the principle that these contracts could be executed automatically according to a set of predefined rules, eliminating the need for third-party intermediaries to verify and enforce agreements.

Bitcoin and the First Applications of Smart Contracts

Although Nick Szabo introduced the idea of smart contracts, the practical realization of this concept did not occur until the emergence of Bitcoin in 2009. Bitcoin, as the first digital currency, used a protocol that can be considered an early form of a smart contract. In the Bitcoin network, transactions are executed under specific conditions, which are encoded within the transactions themselves. For instance, a transaction must be validated by a number of nodes before it is considered valid. These features show that Bitcoin incorporates some of the fundamental principles of smart contracts.

Ethereum Blockchain and the Birth of Modern Smart Contracts

The Ethereum blockchain, launched in 2015 by Vitalik Buterin and his team, was the first network to fully support smart contracts. Ethereum is a programmable blockchain platform that allows developers to create and execute smart contracts and decentralized applications (DApps).

Compared to Bitcoin, which only allows simple financial transactions, Ethereum has the ability to execute more complex contracts that can involve all types of financial, legal, and commercial interactions. This flexibility has made Ethereum the platform of choice for smart contract developers and has led to the widespread adoption of this technology.

What is a Traditional Contract?

A traditional contract is an agreement between two or more parties, either written or verbal, that outlines the obligations, duties, and rights of each party. These contracts are usually drafted using legal language and require oversight and intervention by legal entities such as courts or judicial systems to ensure their enforcement.

In a traditional contract, all terms and conditions that the parties must adhere to are explicitly and clearly stated. For example, in a rental agreement, the landlord agrees to lease their property to the tenant in exchange for a specified amount, and the tenant is obligated to pay the rent at the agreed-upon times. If either party fails to fulfill their obligations, the other party can seek legal recourse (such as through the court) to enforce their rights.

To guarantee the execution of such contracts, intermediaries like the judicial system, banks, or other legal entities typically play a role. These intermediaries oversee the execution of the contract and provide legal services in case of disputes, helping to ensure that the contract is executed correctly and completely.

Difference Between Smart Contracts and Traditional Contracts

Smart contracts and traditional contracts are both types of agreements between parties to fulfill specific obligations, but they differ significantly in their execution, mechanisms, and the technology used. Below are the main differences between these two types of contracts:

Execution Method:

Traditional Contracts: The execution of traditional contracts requires the involvement of legal and judicial authorities. If one party fails to fulfill their obligations, the other party must go to court or a legal authority to pursue their rights.

Smart Contracts: Smart contracts are executed automatically without the need for intermediaries. These contracts are hosted on the blockchain and automatically execute when the conditions specified in the contract are met. For example, in a smart contract where the payment is conditional upon the delivery of goods, the funds are automatically transferred once the delivery is confirmed.

Technology and Platform:

Traditional Contracts: These contracts are prepared in paper form or digitally (as legal documents) and rely on national laws and regulatory bodies.

Smart Contracts: These contracts are written on the blockchain using specific programming languages (such as Solidity for Ethereum). The blockchain, as a distributed and immutable ledger, ensures the security and transparency of executing these contracts.

Need for Intermediaries:

Traditional Contracts: They require intermediaries like lawyers, courts, banks, and other legal entities to facilitate contract execution and dispute resolution.

Smart Contracts: They do not require intermediaries, as everything is automatically executed and coded on the blockchain. This reduces the costs and time associated with intermediaries.

Modifiability:

Traditional Contracts: They can be modified with the agreement of the parties and through legal authorities.

Smart Contracts: Due to the immutable nature of the blockchain, they cannot be altered once deployed and executed, unless such a capability is predefined in the smart contract itself.

Speed and Cost:

Traditional Contracts: Executing traditional contracts is usually time-consuming and costly, especially if court proceedings or legal fees are involved.

Smart Contracts: They are generally faster and cheaper to execute due to the automated processes and lack of intermediaries.

Transparency and Security:

Traditional Contracts: The level of transparency and security varies depending on the country and the enforcing bodies. These contracts may be vulnerable to fraud or varying interpretations.

Smart Contracts:They offer high transparency due to their execution on the blockchain, and their immutability ensures high security. All transactions and contract executions are publicly visible and traceable.

How Does a Smart Contract Work?

A smart contract is a computer program that runs on a blockchain and automatically enforces and executes the terms and conditions of an agreement between parties. These contracts are designed to automatically execute the agreed-upon obligations without the need for intermediaries once the predefined conditions are met. Here's how a smart contract works:

Initially, the parties to the contract must precisely define their terms, conditions, and obligations. These terms are coded using blockchain-specific programming languages (like Solidity for Ethereum). For example, a smart contract for the sale of goods might include a condition that automatically transfers ownership of the goods to the buyer once the payment is made.

After defining and coding the contract, it is deployed on the blockchain. The contract code is sent and recorded on the blockchain as a transaction. Once recorded, the contract becomes part of the blockchain's distributed ledger, making it accessible and immutable across all network nodes.

When the conditions specified in the smart contract are met, the contract automatically executes. For instance, if the contract pertains to the purchase of goods, ownership of the goods is automatically transferred upon payment. All processes and transactions are carried out automatically by the code, with no need for human intervention.All transactions and execution processes of the smart contract are permanently and transparently recorded on the blockchain. This record is immutable, allowing all parties to view and verify the contract's execution steps.

Types of Smart Contracts

Smart contracts can be categorized into different types based on their functionality and purpose. Generally, there are four types of smart contracts:

Payment Contracts: Payment contracts facilitate the transfer of funds between parties based on predefined conditions. These contracts can automate payment processes and ensure that funds are transferred only when specific criteria are met. For example, a payment contract could be set up to release funds to a seller once the buyer has received the goods or services.

Escrow Contracts: Escrow contracts act as intermediaries in transactions, holding funds or assets until certain conditions are fulfilled. These contracts provide an additional layer of security and trust in peer-to-peer transactions, ensuring that both parties fulfill their obligations before funds or assets are released.

Governance Contracts: Governance contracts enable decentralized decision-making within a blockchain network or organization. These contracts allow token holders to vote on proposals or changes to the network's rules, ensuring democratic and transparent governance.

Multi-signature Contracts: Multi-signature contracts require multiple parties to provide their approval or signatures before a transaction can be executed. These contracts add an extra layer of security and can be used in situations where consensus or agreement from multiple parties is necessary.

Advantages of Smart Contracts:

Automation and Elimination of Intermediaries:

Smart contracts are executed without the need for traditional intermediaries such as lawyers, notaries, or financial institutions. This feature makes the contract execution process faster and cheaper while reducing the potential for misuse or fraud by intermediaries.

Transparency and Trust:

Smart contracts are executed on a decentralized and distributed blockchain platform. Due to the use of strong cryptographic algorithms, the possibility of tampering, unilateral termination, or loss of the contract is minimized. The transparency of the blockchain also creates greater trust between the parties.

High Security:

Smart contracts use advanced cryptographic technology, which significantly reduces the likelihood of hacking or data theft. Once the contract information is recorded on the blockchain, it becomes immutable, and unauthorized access is highly difficult.

Cost Reduction: 

By eliminating intermediaries and automating contract execution, the associated costs of drafting and executing contracts are reduced. There is no need to pay fees to notaries, real estate agents, or other intermediaries, leading to significant financial savings.

Versatility:

Smart contracts can be applied in various fields. From financial and insurance contracts to purchase and sale agreements and even legal contracts, a smart contract can be tailored to suit the specific needs and conditions of any transaction.

Speed and Efficiency: 

Smart contracts are executed digitally and do not require traditional paperwork. This feature makes the transfer, execution, and delivery of contracts much simpler and faster than traditional contracts. Additionally, the absence of a need for the physical presence of the parties for signing and confirming the contract saves time and increases efficiency.

Disadvantages of Smart Contracts

Human Error:

Smart contracts are coded by programmers, and there is always the possibility of errors in the code. Since these contracts are immutable once recorded on the blockchain, any mistake can lead to significant issues, making corrections difficult or even impossible.

Lack of Flexibility:

Smart contracts are difficult to modify once they are recorded on the blockchain. This rigidity can be problematic when unexpected conditions arise or requirements change.

Technical Complexity:

Designing and implementing smart contracts require deep technical knowledge in programming and blockchain technology. This can be challenging for users and businesses that lack the necessary expertise.

Lack of Formal Recognition:

Many governments and legal institutions do not yet recognize smart contracts, and there are no clear laws governing them. This could lead to the non-acceptance of these contracts in formal transactions and create uncertainty in their use. Additionally, new regulations might be introduced as authorities enter this space, which may not be favorable to all parties.

High Setup Costs:

Setting up smart contracts requires a high level of expertise in coding and familiarity with blockchain structures. This work requires professional programmers, which can be costly, particularly for small businesses or individuals without the necessary technical knowledge.

Reduced Privacy:

Information in smart contracts is distributed publicly across all nodes in the blockchain network. While this feature can increase security, it also affects the privacy of the parties involved, as the contract's terms are visible to all network members.

Decentralized Finance (DeFi)

Decentralized Exchanges:

Platforms like UniSwap facilitate the trading of cryptocurrencies without centralized intermediaries.

Staking Platforms:

Platforms such as Lido allow users to lock their cryptocurrencies to earn rewards.

Lending Protocols:

Platforms like Aave enable users to lend their assets to others or borrow assets themselves.

Token Creation

Smart contracts can be used to create digital tokens. Standards such as ERC-20 for Ethereum provide the technical framework necessary for creating and managing tokens. Features of tokens, such as supply cap, token symbol, and transfer conditions, are all defined through smart contracts.

Blockchain Games and NFTs

Non-Fungible Tokens (NFTs):

Smart contracts are used to create and manage NFTs. Information such as the owner’s address, price, and transaction history is recorded on the blockchain.

Blockchain Games:

In these games, in-game items and assets are presented as NFTs, and their transfer and exchange are managed through smart contracts.

Digital Identity Management

Smart contracts can automate and secure the process of verifying users' identities so that individuals' identity information can be verified and managed without relying on intermediaries.

Financial Technologies and Banking

Smart contracts can automatically collect and verify documents from customers. These contracts can also execute financial processes like payments and settlements automatically. While their current application in traditional banking is limited, they have significant potential to transform financial and banking systems.

Supply Chain Management

Tracking Goods:

Smart contracts can provide transparent and reliable tracking of goods from production to distribution. Recording transactions on the blockchain through smart contracts creates transparent and immutable records that all members of the supply chain can trust.

Best Smart Contract Platforms

Smart contract platforms are frameworks where developers can create and execute their smart contracts. Each platform has its own features, advantages, and disadvantages. Here are some of the best smart contract platforms:

Ethereum

The first and most widely used platform for smart contracts, Ethereum uses the Solidity programming language for creating smart contracts. 

Advantages: The largest developer community, a rich set of tools and documentation, and a vast ecosystem of decentralized applications (dApps) and decentralized finance (DeFi). 

Disadvantages: High transaction fees (gas fees) and scalability issues, although Ethereum 2.0 aims to address these problems.

Binance Smart Chain (BSC)

A smart contract platform launched by Binance, compatible with Ethereum. 

Advantages: Lower fees compared to Ethereum and faster transaction times. 

Disadvantages: Less decentralization compared to Ethereum and heavy reliance on Binance exchange.

Polkadot

A platform that enables blockchains to communicate with each other. Smart contracts are executed on parachains. 

Advantages: High scalability, interoperability with other blockchains, and shared security among parachains. 

Disadvantages: Complex architecture and the need for developing specific parachains.

Solana

One of the fastest blockchains with high throughput and low fees. 

Advantages: Extremely high transaction speed and very low fees. 

Disadvantages: Smaller developer community compared to Ethereum and less decentralization.

Cardano

A blockchain platform with a scientific, research-driven approach that uses a proof-of-stake algorithm. 

Advantages: High security and stability due to its research-driven architecture and improved scalability. 

Disadvantages: Still in the early stages of smart contract development with fewer developer tools available.

TRON

A platform focused on providing digital content and decentralized applications. 

Advantages: Low fees, high speed, and a focus on digital content delivery. 

Disadvantages: Less decentralization and dependence on the platform's founder.

Tezos 

A platform with self-upgradable capabilities, eliminating the need for hard forks to update. 

Advantages: High scalability and an active developer community. 

Disadvantages: Slower growth compared to competitors and complexity in use.

Avalanche

A scalable and fast platform that uses three separate blockchains for optimal performance. 

Advantages: High speed, excellent scalability, and interoperability with other blockchains. 

Disadvantages: Still in the stages of development and wider adoption.

Algorand 

A platform focused on high speed and security, using a pure proof-of-stake mechanism. 

Advantages: Fast finalization of transactions, low fees, and high security. 

Disadvantages: Smaller developer community and limited support for developer tools.

Fantom

A platform focused on scalability and high speed, utilizing directed acyclic graph (DAG) technology. 

Advantages: High speed and impressive throughput. 

Disadvantages: Smaller developer community and focus on specific projects.

Conclusion:

From the time the concept of smart contracts was introduced by Nick Szabo in 1994 to the emergence of modern blockchains like Ethereum, this idea has come a long way. Ethereum, as the first platform with full smart contract support, created a significant shift in the blockchain world, opening the door for developers to create decentralized applications. Today, smart contracts are a key component of many blockchain platforms and continue to evolve and develop.