Smart Contracts (Definition)
A newbie or a random patron of the cryptocurrency world may be confused with so many new words related to cryptocurrency- coin, blockchain, token, burning, decentralized finance (DeFi), and a host of others. These can be a bit confusing but understanding these terms helps you make informed decisions when dealing with digital currencies. In this article, smart contracts- how it works, their perks, and their application would be fully discussed.
Table of Contents
- 1 What are Smart Contracts?
- 2 How Do Smart Contracts Work?
- 3 Perks Of Smart Contracts
- 4 Applications and Uses of Smart Chain
- 5 References
Smart contracts are self-executing programs stored on a decentralized blockchain network as a code that runs when predetermined conditions are met. Smart contracts automate the execution of the agreement between the buyer and seller without the mediation of a third party (external enforcement). The transactions of smart contracts interactions are irreversible, trackable, and transparent and have clearly stated conditions that all participants are immediately certain of the outcome.
They trigger the next action when conditions are met automating a workflow. Integral components of a smart contract are referred to as objects. Three objects make up a smart contract
- the subject of the agreement or contract
- the signatories, (buyer and seller) involved in the smart contracts. Digital signatures are used to approve or disapprove the contractual terms
- the specific terms.
This works on “if/ when….then” Using literal examples to explain this first,
- Let’s imagine Marcy wants to buy Joe’s truck, this agreement is formed on the Litecoin blockchain using a smart contract. The terms of this agreement would simply look like this: “If/when Marcy pays Joe 100 LTC, then Marcy can own Joe’s truck.
- Money + Candy vending machine= Candy
Notice how the transaction examples above do not need a third party? Also, these transactions cannot be changed (irreversible), meaning you are sure of getting a coffee and Marcy feels safe paying Joe 100 LTC. This is how smart contracts work.
This automated execution when conditions of contracts are met is possible due to the decentralized blockchain. This makes it impossible for these contracts to be controlled by a central party or middleman. This shared network of computers called ‘nodes’ does not belong to one person. Because of this one person or company has control of it making it almost impossible to hack. This is one of the reasons why the blockchain is considered safe.
Prosecution of predetermined conditions like transferring correspondence, releasing finances to the applicable parties, issuing a ticket, or registering a vehicle, is executed by these computer networks when destined terms have been met and vindicated. The blockchain is also streamlined when the sale or transaction is completed. That means the sale can not be changed, and only parties who have been granted authorization can see the results. Smart contracts can be programmed (written code) by a developer and are not created equally.
Autonomy and Trust
There is no centralized authorizing system in smart contracts that act as middlemen or regulators, interaction with smart contracts is trustworthy. Also, transaction records are encrypted records and cryptography keeps these records and documents safe from infiltration therefore information on these computer nodes cannot be said to have been altered for personal benefit.
Automated, fast, and accurate
Since smart contracts work by the ‘if/when…then” principle, the execution of transactions is automated. There is also the perk elimination of multiple errors attached to filling numerous paperwork since it’s digital, making smart contracts more accurate. These automated tasks also save time as they are carried out by computer protocols.
There is no need for intermediaries to handle transactions. The absence of these middlemen in smart contracts sequel cost savings and time delays
Computer networks called nodes of bitcoin are not owned by a single person or company. Transactions on the blockchain are encrypted, this makes hacking almost impossible as hackers would have to hack through half of these nodes. Also, every transaction record is connected to the previous and subsequent records on a distributed ledger, hackers would have to alter the entire chain to change a single record.
Smart contracts can be used in different areas not only in finance. In recent times, organizations use blockchain for business for web interfaces, templates, and other online tools to simplify structuring smart contracts.
Businesses can benefit greatly by using smart contracts to automate p[ay and management of staff. This saves them time and the resources of keeping staff to run payrolls. Automated contracts also ensure timely payment as long as “if/ when….then” is satisfied.
The risks associated with manual and paper-based procedures that go through different procedures are nullified by the use of smart contracts on the blockchain. This reduces the risk of fraud and loss by delivering a secure and accessible digital version to parties involved in the chain. Automation of communication, payments, inventory keeping are benefits of smart contracts in the supply chain. Home Depot has adopted the use of smart contracts too.
The use of smart contracts in government systems like voting provides a medium for not just fair elections which are less susceptible to changes but also secured voting processes. Polls are encoded and ledger-protected and results are transferred by sending a token to an address representing the winner. It will also increase the voter’s turn up as there is always mistrust in voting systems. The errors and inefficiency of manual registrations and mistakes are also eliminated. Follow My Vote makes use of decentralized technology to protect votes from fraud.
The most rampant use of smart contracts is in cryptocurrencies. Blockchain-based platforms like Binance provided a means to ensure interactions with smart contracts, have simplified trading options, to reduce friction and risk while easing the trading process.
This is another ambiguous term associated with cryptocurrency. However, an ICO (Initial Coin Offering) is a crowdfunding system for new applications that use blockchain technology. It allows you to build applications in the blockchain (programming your own smart contract) Anyone who develops a smart contract and deploys it into the blockchain -create a smart contract and a token for that smart contract. ICO’s help you crowdfund to start your own project. However, you need to learn to code a smart contract language and have enough fees to deploy your contracts like vyper and solidity.
Healthcare solutions are now backed up by blockchain technology to solve problems arising from utilizing, generating, and managing medical data including drug information. Health records of patients are encoded and safely stored on the blockchain secured with a private key. Access is only granted to specific individuals or organizations to protect patients’ privacy.
Patients control their data and can also decide if researchers can use their information for research purposes that can be paid for, this research can be conducted confidentially and securely using smart contracts. Medibloc is an example of an application that uses smart contracts to transfer patient data in a secure way, allowing no access from third parties.
Ethereum. “Introduction to Smart contracts” https://ethereum.org/en/developers/docs/smart-contracts
Ethereum. “Smart contracts languaguages” https://ethereum.org/en/developers/docs/smart-contracts/languages/
Corporate Finance Institute. “Smart Contracts” https://corporatefinanceinstitute.com/resources/knowledge/deals/smart-contracts/
Medibloc. “Possibilities of healthcare data” https://medibloc.co.kr/en/
IBM. “Smart contracts” https://www.ibm.com/topics/smart-contracts