What are smart contracts in cryptocurrency trading? A guide for beginners Every day presents a new opportunity to discover a new application...

What are smart contracts in cryptocurrency trading? A guide for beginners

Every day presents a new opportunity to discover a new application of on-chain technology. After laying the groundwork for a disruptive system, it is now bringing about strategic evolutions in sectors such as logistics, web security, and even trade finance. 

However, nowhere is this progress more evident than in its growing role as an alternative payment solution. In fact, Smart Contracts are a fundamental element to promote this modality.

These are essentially automated agreements between the issuer of the "digital document" and the receiver. Once done, it is incorporated into the blockchain, making it immutable and irreversible. Popularized by the world's second best-known blockchain, these contracts have given rise to a series of network-sparse applications and other use cases.

How do these types of contracts work?

Using an analogy, they can be interpreted as a digital “if-then” agreement between two (or more) parties. If the needs of the participants are met, then the agreement can be fulfilled and the contract is considered consummated.

It is also possible to describe its functions with a simple example, if an ice cream parlour promises delivery in half an hour or, if not, returns the money. This business would then establish a CI with the customer making the request for the ice cream.

In fact, the applicant could put the funds in a “guarantee” and, if the ice creams are delivered in half an hour, the funds of the imposed guarantee are released. Otherwise, the funds are returned to the source, the applicant. It is true that the example is very common and general, but it allows us to represent in a simple way how they can be used where some type of guaranteed agreement between the parties is required.

Of course, the above is a small use case. CIs can be programmed to work for large operations. On the other hand, they could also eliminate the need to take certain disagreements to court, saving time and money for participants.

Mixing technological efficiency with digital agreements

The principle of keeping funds in escrow, for example, is completely solved by smart contracts (ICs) without the need for a particularly complicated legal framework that requires fees or an agent. Each party is protected by the agreement. If the seller does not fulfill all the terms of the contract, the other party keeps their funds or other deliverables. The same happens if the buyer does not deposit the funds in the application.

As cryptos gain in use and acceptance, this modality not only allows for more effective and secure trading but also fewer obstacles thanks to experts such as the trading platforms. Companies are already rushing to create simple contract solutions for businesses of all shapes and sizes.

Cons of Smart Contracts

While these new apps are great in concept, they're not perfect. First of all, it must be remembered that ICs and blockchain networks are programmed by hand. Human error is always possible, and that error could lead to exploits.

This is exactly what happened with the attack on Ethereum over 5 years ago. The hackers exploited a vulnerability in the fundraising IC and used it to expose project funds.

Additionally, there is a lack of regulatory clarity when it comes to these stand-alone deals. Although the idea of ​​a secure and streamlined money transfer process sounds great on paper, there are still taxation and other governmental aspects to consider.

Summary

After reviewing the numerous functional advantages of ICs, they stand out as one of the best innovations accompanying the development of blockchain. In addition to helping parties previously uninterested in adopting this technology for various uses, the protections they offer present a win-win scenario.

With automation efforts accelerating around the world, this new development will play a critical role in many industries. It also facilitates the reduction of commissions, accelerating the speed of execution in each operation, guaranteeing performance and increasing protections during the established agreement.