What are smart contracts?
Smart Contracts are the program regarded as a program that is stored on a blockchain. A Smart contracts is a type of digital contract made using blockchain. The most popular platform for implementing smart contracts is Ethereum-which is also a cryptocurrency. The logic of the contract is built upon the initial concept of cryptocurrencies like Bitcoin. Developers initially created Bitcoin to provide a secure way to send money from one person to another without the need for an intermediary like a bank. Ethereum, the second-largest cryptocurrency, built upon this concept to accommodate various applications on its blockchain. The term Ethereum refers to the entire blockchain. However, the currency itself is called Ether.
Smart contracts basically run a series of automated commands to execute various results based on the actions of the involved parties. The code is prewritten to fit the needs of the parties, usually in an ‘if/then’ format. The creator must consider all possible options while writing the code to ensure that the handover of funds goes smoothly. The contracts are self-executing, so once the parties complete all necessary conditions the contract gets to work.
Additionally, it helps to decentralize transactions as well as provide a reliable and secure means of transferring money. Developers can write smart contracts to create various decentralized apps and tokens. Decentralizing contracts removes the need for a middle man entirely, which can save businesses a lot of money.
Like all cryptocurrency transactions, an extremely secure blockchain stores these contracts. Once the owner develops the smart contract and puts in place on the blockchain, no one can change it. This means that once the contract is laid out, it will execute only when its conditions are fulfilled. The smart contract
Implementing a smart contract
Smart contracts also provide more assurance than pen-and-paper contracts. For example, if a person wants to sell another person a car, he may decide to lay down a smart contract. The smart contract states that the buyer will only receive the car once he deposits the agreed-upon amount of money into the contract. Once he deposits the stipulated amount, the smart contract will release the ownership of the car to him. If not paid within the agreed-upon time, then the owner retains the car. There are only two possibilities here- if the buyer pays and if he does not. The smart contract analyzes the action taken by the buyer and acts accordingly.
In both cases, the contract protects the seller against fraud as he either receives the funds or gets to keep his car. He also eliminates the need for the middleman entirely, meaning that he saves money and does not have to worry about any third-party fraud. The buyer is guaranteed to receive a car if he pays, and can walk away freely if he decides not to pay. Hence, smart contracts make previously hectic and lengthy processes simple and feasible for all parties.
Where are smart contracts useful?
This smart contract can also help in various other fields like insurance, legal work, and even Initial Coin Offerings (ICOs). They can decrease costs and delays that come with middlemen, as well as guarantee that the terms of the contract will go through.
Unlike other digital contracts, smart contracts are built on blockchain, which means that they are encrypted in nature. This makes them extremely difficult to hack, which gives an increased sense of security.
Smart contracts may in fact remove the need for middlemen entirely. Though it is a relatively new concept, smart contracts may soon gain popularity in the fields of insurance, real estate, and even banking! Any field which works on the basis of trading and the exchange of money has a lot to gain by implementing smart contracts to protect its financial activities.
How does a smart contract work?
So, how exactly do smart contracts work? Developers builds them on blockchain systems like Ethereum. Though Ethereum is the most popular platform for deploying smart platforms, many others also exist. A smart contract’s code is transparent and any interested person can view it. This is useful as anyone can check whether the code is properly functioning or not. Each computer on the blockchain network contributes to the storage of these smart contracts. Each computer (or node) in the blockchain network is notified when the second party deposits funds into the smart contract. The computers then work together to securely execute the code quickly and efficiently.
Smart contracts operate by stipulating the terms and paying a small contract fee to put the terms in place. The contract fee is usually in Ether and is much less than a lawyer’s or broker’s fees. Anyone with the required coding knowledge (usually JavaScript or Solidity) can write a contract and execute it.
Once the contract is deployed to the blockchain system, it is extremely difficult for anyone, even to creator, to delete or edit it. This is to reduce the chances of fraud and scams. This makes smart contracts extremely useful in activities like voting and crowdfunding, where the chances of malpractice are extremely high. In this way, smart contracts not only provide security to the creator, but to all parties involved in it.
Advantages of Smart contracts
Being self-executing, the contract acts immediately once the conditions are met. This decreases any delays that can be brought upon by the middleman. They exist entirely digitally, so all parties save time that would have otherwise been spent filling out paperwork and checking for errors.
Since the contract exists only between the buyer and the seller (usually the creator) there are low chances of tampering or fraud. Both parties receive a receipt and log of the transaction once the contract executes.
Conclusion
Developing smart contracts is becoming increasingly easier with the introduction of simpler programming applications. Almost anyone can learn to code and create their own contract. However, there is still a lot of time for smart contracts to become the norm in the financial world. Creators may not always adhere to the terms agreed upon, which can cause conflict. There aim is to remove the need for legal remedies in the case of conflict entirely. However, improperly coded contracts may in fact increase conflict.
On the other hand, smart contracts provide a sense of security for people trading from even opposite sides of the world. As it works on a number of predecided rules, it protects both parties even in case the contract falls through. Who knows, maybe the era of smart contracts is closer than we know! It all depends on how fast the domain of smart contracts develops.
