Smart contracts are akin to traditional contracts in that they establish the terms of an agreement. However, the key difference is that, unlike conventional contracts, smart contracts are written in code and operate on a blockchain, such as Ethereum. The concept of smart contracts was first introduced by American computer scientist Nick Szabo in 1994. Additionally, in 1988, Szabo proposed a virtual currency called “Bit Gold” and defined smart contracts as computerized transaction protocols that enforce the terms of an agreement.
This article will explain what smart contracts are, how they work, their benefits, and their applications.
What are smart contracts?
Smart contracts are digital contracts stored on a blockchain that execute automatically when predefined conditions and terms are met. They are primarily used to automate the enforcement of agreements, ensuring all participants can quickly verify the outcome without delays or additional involvement. Furthermore, smart contracts play a significant role across various sectors, helping businesses enhance their operations by promoting efficiency and automation. Essentially, a smart contract functions as a self-executing program that automates necessary actions within a blockchain transaction. Additionally, they enable developers to create a wide range of tokens and Decentralized Applications (Dapps).
How do smart contracts work?
Smart contracts are executed on the blockchain, ensuring that the terms are stored in a shared database that remains immutable. This process automates interactions between parties and manages payments seamlessly. The operation of a smart contract mirrors other blockchain transactions, encompassing several key steps:
- 1. Arrangement of Terms and Conditions: The creation of a smart contract begins with establishing an agreement, where all parties involved must consent to the terms and conditions related to their exchange of goods, services, or payments.
- 2. Creation of the Smart Contract: The agreed terms and conditions are then translated into a programming language to formulate the smart contract, akin to the stipulations found in a traditional legal contract. While the creation process is straightforward, caution must be exercised during development since inadequately written smart contracts pose significant security risks.
- 3. Deployment of the Smart Contract: Once the smart contract is created, the next step involves deploying it onto the blockchain. Similar to other cryptocurrency transactions, the smart contract is shared with the network, embedding its code within the transaction’s data field.
- 4. Accomplishment of Triggering Conditions: A smart contract functions by monitoring the blockchain or relevant data sources for specific triggers or conditions. These triggers can include any digitally verifiable events, such as the arrival of a monthly bill, the completion of a payment, or other confirmable occurrences.
- 5. Implementation of the Smart Contract: The smart contract is executed automatically when the specified conditions are met. This execution may initiate various actions, such as transferring ownership of an asset to the buyer or conducting a fund transfer.
- 6. Recording of Contract Results: The execution of smart contracts is promptly recorded on the blockchain. The blockchain network identifies the actions performed by the smart contract and logs its execution as a transaction, retaining the entire smart contract for transparency. This record is accessible to anyone at any time.
Benefits of smart contracts
- Empower Business Performance: Automating contractual obligations through smart contracts enhances business performance, significantly speeding up transaction processes compared to traditional methods. This automation minimizes human error, ensuring efficiency, accuracy, and timely execution of terms.
- Sustainability: Smart contracts reduce paper usage in documentation, offices, and notary services, contributing to decreased pollution and less travel.
- Efficiency and Speed: Smart contracts execute instantly once their conditions are met. Unlike traditional contracts that necessitate intermediaries and escrow accounts for payments, smart contracts streamline this process.
- Security: Creating a secure smart contract involves ensuring robust and purpose-fit code. With proper testing and support, we can verify that the code functions reliably as intended when the specified conditions are fulfilled.
Applications of smart contracts
- Healthcare: Smart contracts enable efficient maintenance and storage of health records. They can be applied for various purposes, such as medicine traceability, cold chain management, clinical research, and health passports.
- Insurance: The insurance sector incurs significant costs annually on claim handling and processing. Smart contracts can automate payment decisions based on the type of policy, streamlining these processes.
- Real Estate: Smart contracts facilitate more efficient property ownership registration and can be applied beyond just buildings and land to encompass various asset types. They enhance property transfers, improve transaction processes, and reduce paperwork.
- Trade: In trade, most commercial activities rely on funding approvals, which can be resource-intensive and slow. By leveraging smart contracts, this process can be expedited, allowing activities to be completed quickly and efficiently.
- Supply Chain Management: Smart contracts play a crucial role in supply chain management by monitoring goods from manufacturing to delivery. Integrating IoT (Internet of Things) tools throughout the supply chain enhances traceability and records each stage of a product’s journey, improving overall efficiency.
Conclusion
Smart contracts possess the potential to revolutionize digital transactions. Their most remarkable feature is the ability to operate within a tamper-proof and automated environment. By streamlining processes across various sectors such as insurance, supply chain, trade, healthcare, real estate, and more, smart contracts enhance efficiency and reliability.
Additionally, they provide transparency and facilitate secure processes while simplifying complex tasks through automation. As smart contracts pave the way for a more secure, efficient, and open structure in various industries, it is imperative for organizations to grasp how they function and how to develop and utilize these contracts effectively. Understanding this technology is crucial for maximizing its benefits in the age of the Decentralized Web.
