What is a Smart Contract?
Digital contracts stored on the blockchain, but why?
A lack of trust is a major obstacle in today's business world.
Every day, more and more of us stop trusting corporations and each other. We are always cautioned to take things slowly without trust and open communication. We are much more cautious, reducing our ability to be as adaptable as necessary in today's business world.
We rely on these middlemen to help us work through this issue. However, this requires faith on everyone's part. What if the middleman loses our money through fraud or bankruptcy?
With its Smart Contracts functionality, blockchain may offer the best answer here. Let's look to find out what this is and how it operates. You will understand how it works and, hopefully, be able to put it to use in your own life by the time you finish this article.
What are Smart Contracts?
The term "smart contract" refers to any blockchain-based computer program. They are self-executing, meaning they carry out contractual obligations when certain external events occur.
A smart contract is programming code that sits on a blockchain network until a specific transaction activates it.
Smart contract was a term coined by Nick Szabo in 1990. He defined a smart contract as an electronic agreement in which both parties agree to a predetermined outcome if certain conditions are met.
Plus, blockchain facilitates these prerequisites for smart contract functionality. The Ethereum blockchain is widely credited with popularizing smart contracts by making it possible for anyone to write one in the Ethereum Virtual Machine (EVM) or Solidity programming languages.
A smart contract is one of the most secure ways of making a financial transaction today.
Even though a rudimentary smart contract implementation existed in the Bitcoin blockchain, a more advanced implementation was introduced by Ethereum with its Turing Complete language, which has even more incredible computational prowess.
To date, there has been no attempt to restrict the capabilities of a smart contract. There will be an additional discussion of this matter below.
The function of a smart contract.
As we said, a smart contract can carry out its terms. Let's examine the fundamentals and see what we can learn.
The first party makes the offer and starts the deal. The initiating event creates an if-then statement contract in Solidity by the initiating party. After that, the deal is added to the distributed ledger.
Discussion: Once a contract is on the blockchain, it can be viewed by all parties involved in the transaction. The parties are free to bargain over the contract's specifics. Before signing, carefully read over all of the terms and conditions to make sure there are no surprises later.
Consensus: Once all parties agree on the contract terms, the contract's trigger events will be implemented. The parties may agree upon various conditions that will serve as triggers, including but not limited to an expiration date, a due date, a strike price, or a stop-loss. The contract is then finalized and cannot be altered.
Confirmation: Once accepted. Using data from Oracles or Internet of Things (IoT) devices like sensors and cameras, it can automatically verify the contract's conditions.
When the predetermined conditions are met, the smart contract is activated, the assets are transferred, or the predetermined outcome occurs.
This may all be a lot to take in at once. Let's see how an illustration can clarify this for us.
Let's pretend that A wants to buy a house from B. A will use the Ethereum blockchain to create a smart contract. The next step is for negotiations, and then the agreement would be signed by both parties.
Suppose the contract specifies that it will go into effect when B pays A 500 Ether. At that point, B will automatically claim ownership of the property per the terms of the contract. Therefore, the house will officially belong to B.
The solution is that elementary. This deal was made without involvement from third parties like banks, lawyers, or brokers. This ensures the highest level of trust between the parties involved while simultaneously reducing costs
Pros of Smart Contracts
Save both money and time
Smart contracts run on their own. You won't have to rely on your lawyer or bank to schedule appointments or handle transactions. The contract can handle everything on its own. As a result, you cut costs and time on manual labor.
Transparency and trust
Because smart contracts are written on the blockchain, they cannot be changed after they are created. Furthermore, every node on the blockchain can validate the contract. If someone tries to send a fraudulent transaction, the other nodes will reject it right away. Cryptocurrency trading will either return to its previous state or be penalized.
The smart contract is reliant on Oracle's real-time data. Blockchain Oracle connects the digital ledger to the physical world. They connect information stored on the blockchain with information stored elsewhere. They serve as on-chain application programming interfaces (APIs) that smart contracts can query to obtain real-time data.
Data such as prices, forecasts, and odds could be included. Oracles can either "send" or "receive" data from the outside world, depending on their design.
Once all conditions are met on the Smart contract, they have a 100% strikethrough triggering rate. You now have to be concerned about technical errors associated with manual labor.
A distributed ledger is the smart contract we create on a blockchain. Each set of entries is linked to previous and subsequent entries. To change a specific entry, hackers must change all of the data in that blockchain. This is nearly impossible because hackers require more than 51% of all computers running that blockchain.
Use cases of Smart Contract
Here are some real-life use cases of Blockchain Smart Contracts:
Insurance-based blockchain services are already a success. We anticipate a $1.4 billion global market in 2023, with an astounding year-on-year growth rate of 85%.
Let us look at how a smart contract can be used in the insurance industry. Assume you have insurance that will compensate you for a delayed flight. The smart contract is now connected to real-time flight data. The trigger event occurs during a delay, and the amount is automatically credited to your wallet.
Doesn't it sound intriguing? AXA is doing the same thing with its FIzzy insurance product. Other businesses are incorporating smart contracts into their services as well.
Supply Chain Management
Supply chain management refers to managing raw materials for the final product. Using smart contracts and the Internet of Things, we can monitor our shipment at every step until it reaches its final destination. In the Internet of Things, sensors can report in near-real time. Payment will be processed immediately upon delivery of the item.
Smart contracts eliminate a lot of guesswork, allowing businesses to plan when to receive the product more efficiently. As a result, the supply side of a business is streamlined. Penalties and bonuses can also be included in the smart contract. This will incentivize the delivery process even more.
Smart contracts, believe it or not, can be used in games. CryptoKitties is one such example. You can use Ether to buy and sell cats here. Every cat is an NFT.
As a result, each one is distinct. Even if the company goes bankrupt or your account is suspended, you can still own the NFT. Crypto kitties recently made headlines when one of its NFTs was sold for $170,000.
Smart contracts have additional applications. We're only scratching the surface of things here. Soon, smart contracts will be used in many aspects of our daily lives.
Cons of Smart Contracts
The use of smart contracts is not without its drawbacks, just like any other technology. Let us look into them.
There are benefits and drawbacks to this, so the analogy works. To begin with, it's great that the terms of the agreement can't be altered once the contract has been signed. But what if the contractor made a mistake and the code has flaws?
We can't do anything about it now that they're on the blockchain and can't be altered. This necessitates the two parties to sit down and draft a new contract, which can be a costly and time-consuming process.
A primary goal of smart contracts is to do away with the need for intermediaries. However, you can't eliminate them because they serve an essential purpose. For instance, you can draw up a contract without a lawyer.
But the programmer writing your smart contract will need to speak with an attorney to make sense of the stipulations and how they will work.
Speed and Scalability
Since smart contracts are transferred to a blockchain, transaction times are contingent on the blockchain's performance. Compared to Ethereum's 13 transactions per second, Bitcoin can only handle 7. This speed is significantly less for mass adoption. Although other blockchains are considerably faster, creating smart contracts on them may not be as straightforward as on Ethereum.
How can a smart contract be used?
To begin, you must have the native token of the blockchain that you intend to use. In the Ethereum Blockchain, for example, we use Ether tokens. Many dApps are built on Ethereum, and you will be given detailed instructions on using them and their underlying smart contracts.
You can use these contracts for various purposes, including posting uncensorable posts and lending money. The possibilities are endless.
How is Data Secured Using Blockchain Smart Contracts?
Blockchain uses cryptography, public and private key encryption, and decryption computer algorithms to secure user data. Encryption transforms data into a format that an unauthorized party cannot read before it is sent over a network or stored for later use.
Therefore, using a blockchain for financial transactions and data exchange is safe and confidential. A public key can encrypt data before it is sent to another user, and a private key can decrypt the data once it reaches its destination. Because of this, blockchain is among the safest methods for protecting corporate information.
Safety is a must-have function. For instance, a digital asset's value must be uncopyable, stealable, and fungible for the blockchain to facilitate its use for monetary transactions, file storage, or product purchases.
What does it cost to run a smart contract?
Thousands of computers are used to validate smart contracts, which is not cheap. There is also the risk of Ethereum's fees ballooning. The higher the fees and costs of running the Ethereum network, the more congested it becomes.
Are smart contracts legally binding?
Smart contracts can run themselves. That is when the contract is activated. The contract is then automatically enforced. If they function properly, users will not have to go to court to settle their claims.
In 2008, Harvard Law School conducted a study. It was discovered that some smart contracts are legally recognized in the United States. However, not every country takes the same legal stance on cryptocurrencies and blockchain. As a result, ensure that it is legal in your country.
Now, you should have a decent understanding of Smart contracts. Ethereum 2.0 will be released in 2022 to solve the scalability and transaction fee problems.
Incorporating AI into a Smart contract is also possible. One option is to have AI study existing smart contracts between businesses. As a result, the AI can suggest possible clauses that will strengthen the contract.
Transferring data from sensors and cameras that are part of the Internet of Things also requires AI. Doing so provides the contract with reliable data on which to base decisions.
Millions of people may lose their jobs, which is another potential drawback. Professions like lawyers, secretaries, and even middlemen may be threatened.
However, many professionals across fields, including smart contract developer courses, medical professionals, and legal experts, are optimistic about the future of smart contracts thanks to developments in blockchains and their products like DAO and smart contracts.