What are Smart Contracts?


Smart contracts have existed for decades but never took off due to technological limitations at the time. In the growing age of blockchain technology, it is essential to know what smart these are and how they work.
Smart contracts are one of the most developed use cases of blockchain technology. A brief understanding of blockchain technology is essential to understanding how they work. Blockchain technology is the use of a distributed and decentralized blockchain for various purposes. You can learn more about blockchain technology here.
Similar to physical contracts, smart contracts facilitate the exchange of goods or services. These contracts include two parties locked in an agreement. However, the similarities end there.
However, unlike physical contracts, these contracts are virtual and located on the blockchain. Smart contracts essentially take physical contracts and execute them in secure and efficient ways.
How do Smart Contracts Work?
A smart contract is a digitized contract that exists on the blockchain. This contacts contains specific permissions and trigger conditions coded within the contract. Once these conditions are met, the contract is automatically executed. These conditions can be anything, thus, opening up many potential use cases.
Blockchain technology allows smart contracts to function, as they exist within the blockchain. Each contract is identified on the blockchain with a unique address. Users interact with the contract using this unique address.
Developers can employ a variety of conditions tailored to their purpose. Digitized contracts offer flexibility that physical contracts are unable to offer, thus opening them to a whole host of use cases.
Smart Contract Use Cases
Cryptocurrencies – Ethereum was one of the first cryptocurrencies focusing on smart contract development. Unlike Bitcoin, Ethereum allowed individual developers to develop and deploy their own dApps (decentralized applications) onto the ETH blockchain. This allowed Ethereum to function more as a platform, rather than just a cryptocurrency. The Ethereum platform has kept decentralization at heart by allowing anyone to create an Ethereum based token with relatively low experience.
ICO – Initial coin offering use this technology to facilitate token sales. Similar to IPOs, ICOs are a popular way to fund development of a new cryptocurrency. ICOs offer interested investors an opportunity to receive a new cryptocurrency in exchange for funds to develop it. Using smart contracts, developers can code exchange rates for the new currency being offered.
For example:
The ICO exchange rate is 0.01 BTC per token. The user wants to purchase 100 tokens. The user would send 1 BTC to the contract address and would instantly receive 100 tokens. Smart contracts provide a quick and secure method for token distribution.
Potential Use Cases
Elections are ideal candidates for blockchain technology. Voting using smart contracts are efficient and guarantee authenticity of votes as blockchain manipulation is not possible due to its decentralized nature. Implementing this technology will decentralize voting and create a transparent and trustworthy voting platform.
Modern day record keeping is still inefficient and labor intensive. Storing data on the blockchain is less labor intensive and offer numerous advantages over current systems. Furthermore, private keys allow for sensitive data encryption. Only users with access to the private key will be able to view the data, ideal for the healthcare industry.
Mortgages and property ownership is a slow and paperwork intensive process. Smart contracts operate paperwork free property transfers and mortgage payments. Payments and land title transfers are processed seamlessly, and land title transfers can be automated.
Smart contracts have the potential to revolutionize finance and international liquidity. Blockchain technology allows transfers across borders without human intervention. Implementing within the finance industry can provide better liquidity than traditional methods. Furthermore, this contract automation can be used within individual supply chains, tracking the movement of goods on the immutable blockchain.
Advantages of Smart Contracts
Decentralization – Located within the blockchain, all contracts are transparent. Smart contracts can not be misplaced as they are located within the blockchain.
Autonomy – Automation eliminates the need for middlemen. Both parties carry zero liability due to the nature of implementation. Human intervention is non-existent, leading to speed and cost savings.
Speed – Physical contracts require human intervention while automation occurs instantly. Automation enables seamless contract execution bypassing human intervention required with physical contracts.
Redundancy – Every node on the blockchain maintains an up-to-date version of the blockchain. There will always be a transparent record of transactions and trades within the blockchain. This functions as an automatic backup, unlike physical contracts which need to be manually backed-up.
Cost Effective – Eliminating the need for middlemen, smart contracts are essentially free. The only fee parties have to pay is the “gas” fee, usually only a few cents.
Security – Blockchain technology is transparent but also comes with a host of security features. Private key encryption prevents unwanted users from viewing data recorded within these agreements. Private key encryption is foolproof, key holders can view data, no one else. This method of encryption is fool proof.
Trustless – Unlike physical contracts, smart contracts do not have to enforced. Coded into the blockchain, contracts will always be realized once trigger conditions are met. This creates a trust-less system requiring no trusted middlemen. Furthermore, unlike physical contracts with fine print, smart contracts are straight forward and the terms at which the contract will be executed at are clearly presented.
Disadvantages of Smart Contracts
Mainstream Adoption – Blockchain and smart contract technology is still relatively young and is yet to be adopted. Many consumers view smart contracts as complicated and suspicious due to a lack of education on the technology. Therefore, it is essential that the public is educated so we can realize the tremendous benefits that they offer.
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