In traditional finance, a contract is a binding agreement between two parties. In cryptocurrencies, smart contracts execute functions on the blockchain.
Contracts have been a huge part of the interactions between people since the dawn of time. While centuries ago, contracts were predominantly agreed upon in speech only, today, this binding agreement often takes the form of a written or electronic document.
The main purpose of a contract is to denote that person or company A has agreed to have some form of financial dealing with person or company B. For example, if you want to purchase a new house, you will have to sign a contract with the current owner or the bank selling the home. In this case, the contract agreement will detail the purchase price for the property, as well as the time when ownership switches hands, and any other relevant details. When you start a new job, you also sign a contract detailing your work responsibilities and task and the remuneration you will receive for completing them.
Essentially, contracts are an official, binding way to note down an agreement between two parties. In cryptocurrencies, contracts take on a whole new meaning. There are several important types of contracts when it comes to crypto and the blockchain.
Smart contracts are the essence of any blockchain. Thanks to them, all transactions and operations on a blockchain can happen anonymously. Smart contracts are self-executing computer programs with the terms of the buyer’s and seller’s agreement directly embedded into lines of code. The program, along with the agreement it contains, is distributed across a decentralized blockchain network.
Mining contracts are another important form of contract used by blockchain-based systems. Essentially, mining contracts allow users and crypto enthusiasts to mine tokens via utilizing cloud storage. These contracts transfer the mining capacities required to the cloud service, facilitating the mining process without requiring physical storage.
Contracts are an integral part of the global economy. Whatever form they take, without the binding force contracts offer, agreements between parties would have been impossible. We interact with various forms of contracts on a daily basis. We’re essentially signing a contract even when we accept the terms and agreements to use a website or service.
Without the concept of a contract, cryptocurrencies and decentralized finance wouldn’t have come into existence. Thanks to this concept and its improved application from a technological standpoint, blockchains can function the way they do. In this sense, contracts are among the fundamental components of all distributed ledgers and blockchain-based applications we can currently use.