If you are trading cryptocurrencies or delving with technological stuff related to blockchains, you must have heard about smart contracts. In this introduction to smart contracts, I’ll walk you through everything you wanted to know about smart contracts. You’ll also know how they are changing the technology landscape and doing away with the intermediaries (middlemen). If you are looking for a beginners guide to smart contracts, please continue reading.
A smart contract is a decentralized application. In response to events, these decentralized applications DAPPs execute business logic.
Smart contracts programmatically execute business logic for performing multifarious tasks in response to the fulfillment of a given set of tasks. Despite its name, it must be very clear to you that they are in no way legally binding in nature. If you want to link the execution of these smart contracts as legally binding agreements between parties, you must undertake legal steps for legal contracts.
Smart contracts can help in a wide array of works including:
Therefore, you can use smart contracts for exchanging money, shares, properties, and everything valuable. The best thing about these contracts is that any valuable thing can be exchanged in a transparent and free of conflict without the help of middlemen. That’s why smart contracts are becoming very popular among decentralized finance including insurance company and sector. As smart contracts help businesses to automate certain executions, more and more business leaders are adopting these decentralized apps in their project management.
In addition to defining the rules and penalties around an agreement, smart contracts also enforce the obligations of an agreement automatically. To know about technical stuff related to digital contracts, you may read the research papers written by Nick Szabo, who is a computer scientist, cryptographer, and legal scholar.
Let me try to define the usability of smart contracts with the help of an example.
Suppose, you need your escrow or driver’s license. If you want to get it traditionally, you’ve to visit a lawyer or notary, pay them, and wait for them to provide you with the escrow or driver’s license. However, smart contracts would make the entire process automated, simple, cost-effective (transaction costs decrease drastically), and faster.
With smart contracts, you have to make a payment with digital currency or virtual currency into the vending machine, provide the information it asks for, and your escrow or driver’s license will be dropped into your account instantly.
To understand how a smart contract works, here’s a flowchart of 3 important aspects:
When a smart contract is deployed, it is configured in such a way that it is able to listen to the updates of events from an “oracle” (cryptographically secured streaming data sources). When a smart contract receives the predefined appropriate mix of events from one or multiple oracles, the smart contract is executed. This is how processing smart contracts work.
Suppose, you are buying a house from a person named Rupert. Hence, you and Rupert are the contracting parties. An agreement was formed between you and Rupert with a smart contract on the private Ethereum community blockchain. According to it, you’ve to pay 300 ETH to Rupert and in return, he will transfer ownership of the house to you.
If you and Rupert used the traditional way of transferring ownership of the house, you had to pay a lot of fees to third parties such as banks, house brokers, lawyers, and many more. When you’re using a smart contract, the need for any middlemen is done away with and in return, you can save the money that you had to pay those 3rd parties. This is because smart contracts execute automatically when certain predefined conditions are met.
As smart contracts can automate business processes across multiple organizations, it can save resources and eliminate many operational expenses. In fact, no personnel is required for monitoring the progress of the complex process because smart contracts can execute work when certain predefined conditions are met.
The speed of processing business processes, which run across many enterprises, can be improved significantly. That’s why blockchain for businesses is becoming so popular.
Smart contracts can decrease or eliminate the need for a 3rd party or intermediary. This is because smart contracts can execute works on the fulfillment of certain predefined conditions.
Once a set of conditions are defined into a smart contract for execution, they can’t be changed by anyone else. Hence, the execution of works takes place automatically. As no 3rd party is involved in the process and the entire process is automated, contract execution accuracy is maintained fully. In fact, smart contracts also do away with the potential for human error.
Top 3 Best Real Life Use Cases of Smart Contracts:
Healthcare payments can be automated by using smart contracts. This can help in preventing fraud and reducing overbilling.
The music industry can be the real gainer from smart contracts. Ownership of music can be recorded in the blockchain networks. Once done, a smart contract can be deployed. When the owned music is used commercially, the smart contract will ensure that the owner of that music receives royalty every time.
Smart contracts can store readily available information (smart contract data) of a vehicle such as:
With the growing Bitcoin adoption and support for blockchain technology, the popularity of smart contracts is increasing. Many blockchain platforms now use smart contracts such as Ethereum Tezos, Hyperledger, and Corda. This shows how bright the future of smart contracts is.
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