Common Misconceptions

1 minute read

Smart contracts are a key underpinning of blockchain technology. This chapter seeks to further illuminate what they are.

Smart Contracts Are Not Automatic

Smart contracts can be thought of as self-executing pieces of code, but it’s important to note some nuances. When smart contracts operate on a blockchain, they must be invoked with an initial fee. Smart contracts do not run unless they are initiated. When they are initiated, they all run at the same time on all machines participating in the network. Given that all the computers are running at the same time, they come to consensus on the results of the code.

How Smart Contracts Payout

Since smart contracts run on specific blockchains, they pay out in the underlying cryptocurrency or the designated token. For example, smart contracts written on the Ethereum blockchain would payout in ETH or a token built on top of the Ethereum blockchain. Smart contracts cannot make payments or transactions in fiat currencies since fiat currencies are issued and stored at centralized institutions and not in distributed platforms. Smart contracts are only able to issue fiat payments when fiat money is also put on a blockchain platform. This is why regulation efforts and exchanges play a big role in this space.

Smart Contracts and Legally Enforceabitlity

At this point in time, smart contracts are not legally enforceable. Smart contracts can eventually represent legal arrangements, but for now there are a lot of regulation efforts to aid in the adoption of this technology.

Smart Contracts and Decentralized Applications

Smart contracts underpin decentralized applications, providing them with the logic required to carry out their function. Smart contracts also provide the interoperability for decentralized applications to operate with a variety of other technology including Internet of Things (IoT) devices, banking services and systems, assets, and even identities. This versatile technology can truly apply to many use cases and can be programmed to work with a range of industries.

Are Smart Contracts Actually Contracts?

Yes and no. Smart contracts are in a way an agreement but they have the functionality to show a participant whether certain requirements and conditions were met. Smart contracts also have the capability to ‘digitally lock’ an asset if the pre-set requirement or conditions are not met. A smart contract can be audited by all parties, creating the transparency required by various parties to trust it.