Smart contracts are a transaction on a blockchain that execute like a computer program, without requiring manual triggering by an individual or central organisation (Herttig, 2017).
Originally devised by Nick Szabo in 1994 as the foundation of a hypothetical digital marketplace where contracts were immutable and secure (ethereum.org, 2023a).
How do they address the shortcoming of conventional contracts?
Traditionally a contract requires that both parties agree and also uphold their end of an agreement. Such breach of contract is a complex legal issue and laws around them are similarly complex (Kenton, 2023).
Yet smart contracts once established cannot easily be modified, due to a blockchain‘s integrity. As such the outcome of a smart contract is always predictable, without the need for an arbitrator or central authority (ethereum.org, 2023a).
How can they be used to stabilise the value of cryptocurrencies?
There are various methods of stabilising a cryptocurrencies value, known as their ‘stabilisation mechanism’ (Baughman et al., 2023). Known as stablecoins, they are frequently backed by collateral to stabilise their value, although other methods exist (ethereum.org, 2023b).
Stablecoins such as Dai use cryptocurrency collateral to maintain their value. This is managed by smart contracts that convert a collateral of Ether into newly created Dai in the form of a loan. The value of Dai is kept close to the value of the United States Dollar, via smart contracts that liquidate any loans that would sufficiently destabilise its value (Guseva, 2022).
References
Baughman, G. et al. (2022) The stable in stablecoins, federalreserve.gov. Available at: https://www.federalreserve.gov/econres/notes/feds-notes/the-stable-in-stablecoins-20221216.html (Accessed: 31 May 2023).
ethereum.org (2023a) Smart contracts, ethereum.org. Available at: https://ethereum.org/en/smart-contracts/ (Accessed: 31 May 2023).
ethereum.org (2023b) Stablecoins, ethereum.org. Available at: https://ethereum.org/en/stablecoins/ (Accessed: 31 May 2023).
Guseva, A. (2022) Learn more about DAI, an unbiased hybrid stablecoin, CoinLoan Blog. Available at: https://coinloan.io/blog/learn-more-about-dai-unbiased-hybrid-stablecoin/ (Accessed: 31 May 2023).
Hertig, A. (2021) How Do Ethereum Smart Contracts Work?, coindesk.com. Available at: https://www.coindesk.com/learn/how-do-ethereum-smart-contracts-work/ (Accessed: 31 May 2023).
Kenton, W. (2022) Breach of contract definition, Investopedia. Available at: https://www.investopedia.com/terms/b/breach-of-contract.asp (Accessed: 31 May 2023).
