Contracts regulate most aspects of our professional and personal lives, and they are essential to the functioning of modern society.
As an introduction to Blockchain technology, Smart Contracts play a very essential role, it helps to make the transactions taking place more safe and secure and function in an organized manner. And not just that, it helps other components like applications running on these platforms be even more accessible. Let’s dive deeper into smart contract meaning, how smart contracts work, and their benefits.
Smart Contract Meaning
A smart contract is a piece of computer software that is designed as an automated self-enforcing contract, which means it triggers certain action after predetermined conditions are met. Smart contracts can be used, for instance, as digital agreements that intermediate the exchange of cryptocurrencies (or any other digital asset) between two parties. Once the terms of the agreement have been set, the smart contract verifies their fulfillment and the assets are distributed in accordance.
In other words, smart contracts are basically lines of code that execute a specific function once certain conditions are met. The code usually follows "if... then..." statements that trigger predetermined and predictable actions.
For example, an online shop may implement a smart contract that ensures that “if payment is received, then products are delivered” - which would make the whole process more efficient and less prone to human error.
How Do Smart Contracts Work?
A great analogy as to how smart contracts work is to think of them as digital “if-then” statements between two (or more) parties. A smart contract would first require an agreement between two or more parties. Once established, the two can agree on conditions in which the smart contract will be considered complete. The decision would be written into the smart contract, which is then encrypted and stored in the blockchain network.
If one group’s needs are met, then the agreement can be honored and the contract is considered complete. Once the contract is complete, the transaction is recorded on the blockchain just as any other would. Then, all nodes will update their copy of the blockchain with this transaction, updating the new “state” of the network.
For example, let’s say a market asks a farmer for 100 ears of corn. The former will lock funds into a smart contract that can then be approved when the latter delivers. When the farmer delivers their obligation, the funds will immediately be released (i..e, after fulfillment of a legal contract). However, if the farmer misses their deadline, the contract is canceled and funds locked are reversed to the client.
Benefits of Smart Contracts
Smart Contract blockchains provide various benefits, including speed, efficiency, accuracy, trust, transparency, security, savings, as discussed in the sections below.
Smart contracts use computer protocols to automate actions, saving hours in various commercial processes. The automated agreements decrease the possibility of third-party manipulation by eliminating the requirement for brokers or other intermediaries to ratify the already signed legal contracts.
Furthermore, the lack of an intermediary in smart contracts saves money. Also, all relevant parties have complete visibility and access to the terms and conditions of these contracts. Therefore, there is no way to back out once the contract is signed. This ensures that the transaction is entirely transparent to all parties involved.
Moreover, all documents kept on the blockchain are duplicated many times, allowing for the restoration of originals in the event of data loss. Smart contracts are encrypted, and cryptography protects all documents from being tampered with. Finally, smart contracts also eliminate errors that occur due to manual filling out of several forms.
Use Cases Of Smart Contracts
Aside from the payments example mentioned above, there are various, potential implementations of smart contracts that can automate the world and make it an easier place to live. Here are some prominent examples of smart contract use cases.
Digital Identity
On the internet, information is currency. Companies profit off of knowing everyone’s interests and people are not always in control of how that data is acquired, nor do they profit from it. With smart contracts, people are in control.
In a blockchain-based future, identities will be tokenized. Ideally, this would mean each person’s identity exists on a decentralized blockchain, safe and secure from any bad actors. Now, if a user wants to participate on social media or submit documents to a bank for loan purposes, they can profit from the former and control the transaction process in the latter.
For social media, no intermediary controls a network. Instead, users choose which information to make public and which to keep private. Should they want to participate in information exchange, like an endorsement, they can create a smart contract and choose which data is transacted, rather than simply taking everything about the user. A third party isn’t there to take some of the funds or secretly store and sell that data – only the user profits.
Real Estate
In the traditional world, real estate brokers are a necessary evil. Considering the act of selling a house is nothing short of long and convoluted, owners will hire a broker to manage the confusing parts for them, such as the paperwork and finding a buyer. While that sounds ideal for the seller, remember that brokers take a significant fee of the house’s sell price.
A smart contract can take the place of a broker, streamlining the house-transfer process while ensuring it’s just as secure as with an intermediary. This is where the “trustless” moniker comes into play.
Imagine the deed to your house is tokenized on the ETHereum blockchain. If you’re ready to sell it, you’d create a smart contract with the buyer. That contract would hold the deed in escrow until the buyer’s funds are properly submitted. Then, and only then, it will be released.
Everyone wins. The seller saves money as they don’t have to pay an intermediary and the buyer gets the house much sooner than they would have otherwise.
Insurance
Insurance policies could easily benefit from smart contracts. Essentially, signing up for a policy would enter the user into a smart contract with a provider. All policy requirements would be written into the smart contract, which the user would read and sign if they agree.
That contract would sit open until the liable party needs it. Then, they’d simply upload the required forms that prove their need for insurance payment and the funds would be released. This type of contract removes the need for communicating with insurance groups and individuals. While the user would still need paperwork to prove their requirements, the subsequent submission and funding process will be close to instant.
In the identity aspect of things, it’s worth keeping in mind that all drivers will have a record of their accident reports and other important insurance information as well. This accessibility could factor into lower rates for good drivers with no dings on their driving history.
Closing Thoughts
Having learnt how smart contracts work and the benefits of smart contracts, there is no doubt that they have caused a big impact in the world of cryptocurrencies, and they certainly revolutionized the blockchain space. While the end-users may not interact directly with smart contracts, these are likely to power a wide range of applications in the future, ranging from financial services to supply chain management.
TogETHer, smart contracts and blockchain have the potential to disrupt almost all areas of our society. But only time will tell if these groundbreaking technologies will manage to overcome the many barriers to large-scale adoption.
