Photo by David McBee from Pexels
The term gets tossed around within the crypto-space often; smart contracts are a very important aspect of cryptocurrency-normalization that will play a very important role in both the development of the market and the average person’s life.
What does the “smart” in smart contract mean? Put simply, a smart contract legally acts the same as any other contract that the average individual uses today, with the exception that the agreement is written directly into computer code that resides on a blockchain. This code is completely unalterable by any party written in the contract until conditions of said contract are met on the network; no money is distributed otherwise. This is not only functionally excellent, but acts as an extra layer of security to any otherwise standard contract. What is a blockchain? Blockchains are very important to the structure of almost every major type of cryptocurrency, explained more here. It is a database for all transactions taking place on one particular network, or specific cryptocurrency.
So how do “smart contracts” and mainstream cryptocurrencies (Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), etc) relate to each other? Well, certain cryptocurrencies are much better at executing these contracts than others. This is one reason why Ethereum currently holds number two in market cap for cryptocurrencies; Ethereum (ETH) is one of the most well-equipped blockchains to handle smart contracts as they become more prevalent. It was built with this intention. There are other blockchains that are attempting to replicate these ideas, with cryptos like Cardano (ADA) recently announcing smart contract functionality with the Alonzo hard-fork. All of this and much more has created a bit of competitive nature as to which crypto will become the “king of smart contracts”. Then, there is Bitcoin (BTC). It was never fantastic at executing smart contracts, nor was it built to handle the complexity of such things. This will all change towards the end of this year with Bitcoin’s long-awaited Taproot update. The update will ditch the existing ECDSA structure in favor of the new Schnorr structure. The usage of Schnorr signatures/structure will allow the Bitcoin (BTC) network to function in a much more complex way, making it possible to “pack” multiple signatures and transactions into a single one; this newfound complexity will allow smart contracts to finally exist on the Bitcoin (BTC) network. So aside from all of these complex-looking terms, how will this affect the average person?
As cryptocurrency becomes more mainstream, smart contracts will potentially become a much more normal part of life. In any scenario where there are separate parties engaging in a transaction, smart contracts can play a role. Mortgages, direct loans, car payments, child support, and anything under the sun in finance may gain exposure to this. The average individual may be making their house payments with a smart contract decades out; it’s always good to have an awareness of the ever-evolving financial institution.
Sources:
McBee, David. “Round Silver and Gold Coins.” Pexels, Pexels, 11 Dec. 2017, www.pexels.com/photo/round-silver-and-gold-coins-730564.
“Smart Contracts: What You Need to Know.” Investopedia, 26 May 2021, www.investopedia.com/terms/s/smart-contracts.asp.
“Blockchain Explained.” Investopedia, Investopedia, 1 June 2021, www.investopedia.com/terms/b/blockchain.asp.
Insider, Portfolio. “Bitcoin Just Received Its First Upgrade In Four Years.” Nasdaq, 15 June 2021, www.nasdaq.com/articles/bitcoin-just-received-its-first-upgrade-in-four-years-2021-06-15.
“Elliptic Curve Digital Signature Algorithm - Bitcoin Wiki.” Bitcoinsv.Io, 2019, wiki.bitcoinsv.io/index.php/Elliptic_Curve_Digital_Signature_Algorithm#:%7E:text=Elliptic%20Curve%20Digital%20Signature%20Algorithm%20or%20ECDSA%20is%20a%20cryptographic,control%20of%20ownership%20of%20funds.&text=In%20Bitcoin%2C%20a%20private%20key,bit%20integer%20(32%20bytes).
Ethereum. “Introduction to Smart Contracts.” Ethereum.Org, 2021, ethereum.org/en/developers/docs/smart-contracts.
“Cardano’s Alonzo Now Runs Smart Contracts, Development Update Reveals.” YahooFinance, 2021, finance.yahoo.com/news/cardano-alonzo-now-runs-smart-141400508.html.
“EMURGO | Providing Global Blockchain Solutions.” EMURGO, 2021, emurgo.io/blog/what-will-cardanos-alonzo-hard-fork-do.
“Hard Fork (Blockchain) Definition.” Investopedia, 2021, www.investopedia.com/terms/h/hard-fork.asp.
Jenkinson, Gareth. “Unpacking Schnorr Signatures: Blockstream’s MuSig to Improve Bitcoin Transactions?” Cointelegraph, 7 Mar. 2019, cointelegraph.com/news/unpacking-schnorr-signatures-blockstreams-musig-to-improve-bitcoin-transactions.
Comments