Smart contracts on the blockchain are possible because of the Ethereum network, that uses the rapid explosion of ICOs during the 2017 crypto bull market. Companies were able to create arrangements & agreements in a decentralized manner. Moreover, this allows parties to execute pre-programmed contracts instantaneously, anonymously and securely.
The most widely applicable real-world use cases of blockchain technologyoffers a decentralized platform which eliminates third party involvement and shares among all members of the blockchain.
Smart contracts are an essential component in increasing the adoption of decentralisation systems,improving business and contractual efficiencies simultaneously across borders.
What are Smart Contracts
Smart contract are simply a system that allows users to enter any agreement without the interference of an 'middle man'. This helps reduce cost and improves security.
It is a simple executable program in the blockchain network that stores the rules or instructions of a particular agreement. A smart contract automatically authenticates if the agreement has been a success then carries out the conditions of the agreement.
A drive through smart contract is the transfer of digital assets or currencies between different parties under a particular circumstance.
A smart contract behaves in an intelligent manner where transactions made under it cannot undergo tracking or reversing. They are similar to conventional contracts as they can also enforce consequence by code and not by law.
How Smart Contracts First Began in the 90s
Smart Contract technology is a concept brought forward by a famous cryptographer, Nick Szabo in 1994. His theory was that you can write contracts in code then keep, facilitate and control these contracts by a network of computers, on the blockchain.
Nick's aim was to minimize the cost of the transaction while providing a better layer of security. Nick Szabo repeatedly did work on the project before the word 'Smart Contracts' was and put to use.
How do Smart Contracts Work?
Smart contracts were developed in a way that value can be transferred among different parties in a trustless manner. The very first cryptocurrency to utilize the concept is Ethereum. Just like the traditional contracts, the smart contracts also have the details and instruction of an agreement written in code and an exact series of events is expected to occur before the agreement of a smart contract can be activated. The deadline in the contract can as well be initiated with the use of time constraints.
Source: gemsdigital media
To further understand the way work, let's use this example:
Live Example
Michael needs to get a car and is willing to buy from John, a car dealer. Since Michael and John don't know if they can trust one another, they have to make use of an external body as an 'escrow service' or a 'middle man'. This results in extra cost as the external body has to be paid an agreed percentage of the transaction value and in the event of any misunderstanding, resolving the dispute will take more time.
However, if Michael and John choose to utilize a smart contract, all the conditions of the agreement are guaranteed to be met and since these terms and conditions cannot be changed, Michael and John cannot double-cross each other.
For Michael and John Smart contract, these terms can be set;
- Independent storage that lets both Michael and John store value but cannot easily take it out is created.
- John inputs the money for the car in the created storage.
- Then Michael inputs the car location and the access code in the storage.
- Michael receives a confirmation of payment and John is given the location of the car and the access code.
- If John likes the car and agrees to get the car, Michael receives the payment for the car.
- If John sees the car and doesn't like it, Michael gets paid for damages and John gets back the remaining payment.
- The agreement is only ended when the contract is accomplished. Once the agreement ends, the contract is then stored on the blockchain.
Benefits of Smart Contracts
A smart contract helps guarantee that all parties involved in the agreement are 100% contented and everyone goes home happy.
If Michael, the car dealer, is impressed with the contract and wants to use it for every one of his car sales, he doesn't have to generate a new smart contract for every buyer he meets. All he needs to do is to simply create a general agreement for all his potential buyers. This agreement is created on the blockchain and the same algorithm used above is then used for every car sale.
Taking this a step further, this contract could be programmed to work for other car dealers, not just Michael. It can also be programmed to include some special features like automatically modified prices, installment payments and other features a car buyer could want.
Why Should We Trust these Contracts?
Smart contracts are built and implemented on the blockchain so they have similar attributes as the blockchain. These attributes include;
- Immutability -- Nobody can change a smart contract.
- Distribution -- The result of a smart contract can be validated and verified by all parties on the network. Should there be an attempt to alter the contract, all the parties involved will be notified to mark it as invalid.
Advantages of Smart Contract
- To store immutable records -- All the transactions carried out on the blockchain are saved in sequential order and can be accessible including the entire audit trail. But the privacy of all involved parties is fully secured cryptographically.
- It helps save money, time and other resources -- Making use of smarts contracts helps stop the use of 'middlemen' or intermediaries of all kinds as well as the need for paperwork thus saving money and other resources.
- It detects and reduces fraudulent activities -- This is because these contracts are stored on the blockchain network and attempting to modify the blockchain forcefully is a very difficult task. Also, nodes in the blockchain network are programmed to detect any breach of the contract and then such breach is tagged as invalid and therefore not stored on the network.
- Improves trust -- Blockchain automatically fulfils and enforce agreements. Besides, the agreements are definite, unchangeable and unbreakable.
- Direct interaction between the involved parties -- Smart contracts don't require the use of intermediaries; it fosters transparency and the relationship with customers.
- It cannot fail -- Due to the decentralization of the blockchain, smart contracts are immune to failure because no single entity is in control of the digital assets and neither of the involved parties can back out of the contract. So, even if a node disconnects itself from the blockchain network, the smart contract still remains intact.
Source: vas3k.com
Disadvantages of Smart Contracts
As smart contract technology is a new concept it isn't fully understood, it is still complicated and difficult to execute.
Overseeing these technologies (Smart Concepts, Cryptocurrencies & Mining) is difficult because of the absence of regulations on the blockchain technology
The possibilities of real-world applications involving smart contracts are limitless. It allows you to directly exchange money, properties, documents, shares and many other valuable things in a conflict-free, transparent system . They have plenty of benefits such as improving efficiency, transparency, and reduction of overhead costs for multiple industries.
Only time will tell to what extent will smart contracts create long lasting benefits to individuals and businesses globally. Since the rise of ICOs powered by Ethereum were proven in 2017, the sky's the limit for smart contract applications.
