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In simple terms, a smart contract is an agreement that is executed using code on a blockchain, such as Ethereum. Unlike traditional contracts, which are written on paper and rely on trust, smart contracts utilize the security and reliability of blockchain technology.
Smart contracts have a wide range of applications, enabling peer-to-peer functionality in various areas like credit, insurance, logistics, and games. Developers can leverage the benefits of blockchain to build applications that are secure and accessible. Instead of relying on physical documents and lawyers, smart contracts use code running on a blockchain to define and enforce the terms of an agreement.
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The concept of Bitcoin introduced the idea of conducting transactions without the need for a trusted intermediary like a bank. Smart contracts take this concept to the next level by automating and decentralizing transactions and contracts securely. They enable the creation of decentralized applications and tokens across different industries, including finance, logistics, and gaming. All smart contract transactions are stored on the blockchain, similar to other cryptocurrency transactions.
These smart contract-powered applications are often referred to as decentralized apps or “dApps.” One prominent example is decentralized finance (DeFi) technology, which aims to revolutionize the banking industry. DeFi applications empower cryptocurrency holders to engage in complex financial transactions such as savings, loans, and insurance from anywhere in the world, without the need for banks or other financial institutions to be involved in the process.
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