TRANSCRIPTION
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Smart contracts (also called distributed apps) are very popular nowadays.
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But what are they and what problems do they solve?
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The term “smart contract” was first used by Nick Szabo in 1997, long before Bitcoin
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was created.
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He is a computer scientist, law scholar and cryptographer so I’ll spare you his exact
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words.
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But in simple terms: he wanted to use a distributed ledger to store contracts.
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Now, smart contracts are just like contracts in the real world.
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The only difference is that they are completely digital.
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In fact a smart contract is actually a tiny computer program that is stored inside a blockchain.
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Let’s take a look at an example to understand how smart contracts work.
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You probably are familiar with Kickstarter, the large fundraising platform.
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Product teams can go to Kickstarter, create a project, set a funding goal and start collecting
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money from others who believe in the idea.
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Kickstarter is essentially a third party that sits between product teams and supporters.
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This means that both of them need to trust Kickstarter to handle their money correctly.
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If the project gets successfully funded, the project team expects Kickstarter to give them
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the money.
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On the other hand, supporters want their money to go to the project if it was funded or to
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get a refund when it hasn’t reached its goals.
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Both the product team and its supports have to trust Kickstarter.
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But with smart contracts we can build a similar system that doesn’t require a third-party
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like Kickstarter.
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So let’s create a smart contract for this!
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We can program the smart contract so that it holds all the received funds until a certain
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goal is reached.
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The supporters of a project can now transfer their money to the smart contract.
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If the project gets fully funded, the contract automatically passes the money to the creator
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of the project.
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And if the project fails to meet the goal, the money automatically goes back to the supporters.
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Pretty awesome right?
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And because smart contracts are stored on a blockchain, everything is completely distributed.
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With this technique, no one is in control of the money.
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But wait a minute!
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Why should we trust a smart contract?
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Well because smart contracts are stored on a blockchain, they inherit some interesting
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properties.
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They are immutable and they are distributed.
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Being immutable means that once a smart contract is created, it can never be changed again.
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So no one can go behind your back and tamper with the code of your contract.
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And being distributed means that the output of your contract is validated by everyone
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on the network.
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So a single person cannot force the contract to release the funds because other people
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on the network will spot this attempt and mark it as invalid.
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Tampering with smart contracts becomes almost impossible.
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Smart contracts can be applied to many different things, not just on crowdfunding.
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Banks could use it to issue loans or to offer automatic payments.
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Insurance companies could use it to process certain claims.
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Postal companies could use it for payment on delivery, and so on and so on…
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So, now you might wonder where and how you can use smart contracts.
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Right now there are a handful of blockchains who support smart contracts, but the biggest
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one is Ethereum.
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It was was specifically created and designed to support smart contracts.
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They can be programmed in a special programming language called Solidity.
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This language was specifically created for Ethereum and uses a syntax that resembles
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Javascript.
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Its worth noting that Bitcoin also has support for smart contracts although it’s a lot
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more limited compared to Ethereum.
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So now you know what smart contracts are and what problem they solve.
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I hope you enjoyed this video and if you did, hit the like button and get subscribed.
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And as always: thank you very much for watching! #youtube/simply-explained
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