What are Smart Contracts? Explained like you are 5 year old.


Have you ever heard of ‘Kickstarter’? Its where you have an Idea but dont have the money. You make a page and show off your idea where other people can donate to your project. For example, someone might have an idea for a book which explains Cryptocurrency Concepts. They will create a page and say they have a goal of raising $1000. In turn for people donating, they will give out a book for everyone that donates. So after a week of running this campaign, they raise over $1300. Since they completed the goal, Kickstarter will give them all the money donated. However, if they were not able to raise the goal amount, Kickstarter will return all the money to the people who donated. Smart Contract is exactly like this.

Its a piece of code that does something, if something else happens. It goes like,

if ( ) { result = ‘____’; } else { result ; }

Purposes of smart contracts are endless. But two main things make Smart Contracts beneficial,

They are immutable – This means they cant change. If the code is on the blockchain, it can never be changed. Downside to this is, if there is bug, it will still be present in the blockchain, and no one can correct it. You can only ask people to not use that code. This happens very often.

They are distributed – This means theres no discrepancies. You cant hire a lawyer and be like, that was in our agreement. These smart contacts are an agreement between a few parties online that can be automatically executed if certain conditions are met. Smart contacts are a piece of code designed to remove human error and issues.

Smart Contacts are financial agreements that nobody can argue because they are code, they dont change and everybody has access to them.

Some examples of Smart Contacts use –

Flash Loan You could borrow 10 million dollars with no money down. If you write a smart contract which pays it back in the exact same minute.

You could buy bunch of doge coin on coinbase for 10m, then sell it to gemini, then pay back the original loan amount with some interest. This is called a flash loan, you could be able to pull it off if you write a good smart contract.

Some guy made $360,000 in a few minutes.

Smart contracts will be able to check itself. It will actually think if its possible for you to payback the amount in a minute after it renders the code, otherwise it doesnt work.

Insurance You can create an insurance company by writing some smart contracts. With ‘if this happens, that will be done’ code.

Token Switching You can create a pool of money with two different tokens. You write smart contract, to allow traders to switch out one token for another token and as one increases in volume, you increase the price of other token. This way you keep steady value in the pool. This is roughly how decentralised exchange works.

Thank you for reading. Go teach this to other 5 year olds.

submitted by /u/AffectionateMind26
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