What Are The Roles of Smart Contracts In Cryptocurrency?
“Smart contracts” is a popular term that is commonly used within the crypto community, which most people still find confusing. Almost everyone is familiar with the phrase “contracts,” as they govern the majority of our personal and professional activities and are necessary for present society to function properly.
However, the fundamental components of a real-world contract have now been more effectively and robustly brought to the cryptocurrency and blockchain industries. This might be quite daunting to a layperson who is not familiar with smart contracts or how a contract could be brought into the blockchain space.
Nevertheless, the concept and its implications are relatively simple to comprehend once the meaning is understood. Once people have a solid understanding of the meaning, the numerous uses and functions of its applications and roles in the cryptocurrency space become clearer.
Therefore, this article will primarily focus on the functions that smart contracts play in the cryptocurrency world, even though they are currently used for a wide range of other things, both digitally and in real-world transactions.
What Are Smart Contracts?
A smart contract is a type of “contract” that exists in the form of a computer program and is automatically carried out when certain pre-set conditions are met. These smart contracts are built on the blockchain and aim to make trade and communication between anonymous and recognized participants easier–typically without the need for an intermediary.
Furthermore, this digital form of contract enables developers to create apps that leverage blockchain security, dependability, and accessibility while providing advanced peer-to-peer functionality — including everything from loans and insurance to supply chain management and games. Essentially, smart contracts lessen the formality and expenses of conventional processes without sacrificing authenticity and legitimacy.
The majority of decentralized exchanges with automated market makers (AMMs)–just like Pancakeswap and Melegaswap–operate in this way to conduct trades and other transactions amongst traders. The fact that the conditions are formed and carried out as code running on a blockchain as opposed to a physical document that needs to be duly signed by the contractual parties is what defines smart contracts as “smart.”
Roles of Smart Contracts In Cryptocurrency
The following are some of the major roles played by smart contracts in blockchain and cryptocurrency transactions;
Trading
Most decentralized exchanges use Automated Market Makers (AMMs), which are smart contracts that trade liquidity between cryptocurrency token buyers and liquidity providers on a decentralized exchange.
Many of the leading Defi protocols and applications are built around AMMs. They are decentralized trading platforms that enable you to buy and sell cryptocurrencies while directly providing markets with liquidity.
For instance, MelegaSwap makes use of AMM smart contracts to build a liquidity pool of BEP-20 tokens that adhere to a standard on the Binance smart chain (BSC) network. Instead of using an order book to execute trades, the algorithm automatically makes trades in this liquidity pool.
The function of smart contracts, in this case, is to replace a conventional limit order book with a mechanism that allows assets to be automatically exchanged against the most recent price of the pool.
Transactions Speed and Accuracy
Smart contracts are automated, so there is no paperwork to handle and no time spent fixing mistakes that frequently occur when manually filling out forms. When a prerequisite is satisfied between the contracting parties, the agreement will be immediately put into effect.
This has made it possible for anybody with a mobile phone and internet access to conduct transactions practically as quickly as light with anyone from anywhere in the world–which is not feasible in the conventional banking system.
In the traditional banking system, moving or exchanging currencies is expensive and time-consuming, and lending one’s liquid assets to strangers on the other side of the world isn’t a simple or secure operation. But smart contracts make all of those instances, as well as a wide range of others, possible.
Trust and Transparency
The information in smart contracts operation is available to all the parties involved in the contract. Additionally, this data may be found on a distributed ledger, which shows the record to thousands of users simultaneously in real-time.
Therefore, there is essentially little danger of theft or hacking, making the system incredibly secure. If this record is to be erased or amended at any time, there must be agreement among the thousands of individuals who have the copy. This is virtually impossible. As a result, there’s no need to wonder whether information has been tampered with for personal gain.
Security
Smart contracts are executed automatically without leaving room for the risk of human error. Similarly, the encrypted nature of blockchain transaction records makes smart contracts incredibly difficult to hack. Hackers would probably need to change the entire chain in order to change just one record since each entry on a distributed ledger is linked to the entries before and after it. This also appears impossible.
Privacy
The right to privacy refers to a person’s ability to keep their data or personal information private and to avoid having their activities observed or recorded by another party. Users can conduct transactions using blockchain-based contracts while maintaining their anonymity by just disclosing their public wallet address.
As a result, one does not even need to be frightened of making a deal with a total stranger since smart contracts enable trustworthy transactions and agreements to be carried out among dispersed, anonymous participants without the need for a centralized authority, legal system, or external enforcement mechanism.
Closing Thoughts
In addition to crypto-related transactions, smart contracts are expanding prospects in the real world by doing away with trusted middlemen and other tedious tasks associated with the current financial system. Consequently, money that would otherwise be paid to intermediaries might be saved — as smart contracts are more cost-effective than conventional contracts. Finally, smart contracts now allow us to avoid these middlemen’s time delays, thereby fostering transactional efficiency.
