Still Can’t Figure Out Smart Contracts? Read This
By: Tinaga Island Resort
Tags: Smart Contracts, Blockchain Technology, Nick Szabo, Blockchain Contract, Ethereum Blockchain

One of the amazing gifts the blockchain has given us is smart contracts. Blockchain technology has not only given us control over our money but also ensured that we can enforce agreements without middlemen. The purpose of this guide is to help you understand smart contracts and how they work. Keep reading to learn more.

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The History of Smart Contracts

The concept of a smart contract is not new. Back in 1994, Computer Scientist Nick Szabo proposed smart contracts for the first time. However, the developer world achieved the application of the concept in the 21st century. After Satoshi Nakamoto released the first successful use case of blockchain technology in 2009, he opened up the world to a lot of possibilities, including smart contracts.

With the blockchain, an idea that a Computer Scientist proposed about 15 years earlier can now run effectively!

Szabo is the creator of Bit Gold, one of the earliest virtual currencies. Additionally, the bitcoin community has suspected him of being Satoshi Nakamoto.

What Are Smart Contracts?

According to Szabo, a smart contract is “a computerized transaction protocol that executes the terms of a contract.” This type of a contract is written in code, executing the terms of a contract automatically based on an if/then condition.

In his smart contract paper, Szabo explains that the objectives of a smart contract are “to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries.”

You can use smart contracts to perform tasks like property transactions, car purchases, and to exchange shares. Since a smart contract runs on the blockchain, it benefits from transparency, the elimination of middlemen, and it does away with conflicts. It is for this reason that a smart contract is also called a blockchain contract. Other names include self-executing contracts and digital contracts.

Note that a smart contract can run on any blockchain. One of the most popular blockchains that run smart contracts is Ethereum.

How Do They Work?

A developer will create a smart contract based on conditional programming where it executes an agreement if the set conditions are met. Therefore, based on the actions of the parties involved, the smart contract will determine if the asset in question will go to the intended person or back to the seller. In addition, it will determine if it should refund the payment or hold the payment if the funds are sent earlier than the agreed-upon date.

To illustrate how such a contract would work, imagine that you want to sell your car. You have decided to use a self-executing contract because it will make the transaction smooth. Also, you have decided to use the Ethereum blockchain to make the transaction.

You might need the help of a developer to create a smart contract. However, you and the buyer have to create and agree on the rules of the transaction.

The other components of a smart contract are:

Digital signatures. These are the private keys for the parties involved. You will use the private keys to initiate the contract.

These are the private keys for the parties involved. You will use the private keys to initiate the contract. The Subject of the contract. The subject gives the contract access to the item that the parties are exchanging. In this example, the subject is the car.

Keep in mind that you will also have to upload to the blockchain all the necessary materials such as car ownership and personal identification documents to make the transaction a success.

To begin the transaction, the buyer will send the payment in ether for which they will get a receipt. The funds will be held in escrow. Next, you will send the digital key that gives the buyer access to the ownership documents. Once you send the documents, the payment will be released from escrow and into your wallet. Simple and fast, right?

From the above example, the buyer will only receive car ownership documents if they send the payment. On the other hand, you will only receive the payment if you transfer the ownership documents.

The parties involved cannot interfere with the contract because they will both get an alert. Additionally, the documents that you add to the blockchain are encrypted and kept safe thanks to cryptography.

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Where Can You Use a Smart Contract?

You can use blockchain contracts in various ways. Here are a few possible applications:

Supply chain: a smart contract can reduce fraud, payment delays, and costs in the supply chain. For instance, a supplier can start creating a new product once he receives payment from the previous supply. Car insurance: insurance companies can use a smart contract to charge varying rates depending on the location and the conditions under which clients are operating the vehicles. Real estate: you can use a self-executing contract to conduct a lease transaction. If the tenant pays, then the landlord will release the lease documents giving him occupancy rights. For instance, the Tinaga Island Resort crypto project could use smart contracts during our villa pre-sale. The smart contract executes if the buyer sends payment, which is then held in escrow. We would then have to send the digital key that will give the buyer access to the necessary ownership documents to receive the payment. Health: a healthcare facility can use a smart contract to give access to personal health records to only a few people. Therefore, if you do not fit the eligibility criteria, the smart contract will deny you access to the data.

Is There a Downside to Smart Contracts?

Smart contracts offer trust, autonomy, security, speed, accuracy, and cost reduction. However, they have their downside as well. Think about it. How can you tax transactions taking place via a smart contract? How can governments regulate smart contracts? Is government regulation a good thing in this case? These are complex matters. Therefore, the difficulty of integrating regulations with smart contracts could inhibit faster adoption.

Another factor to keep in mind is that a court of law might not recognize a smart contract as legal proof if there is a conflict. Also, the role of lawyers is not eliminated when it comes to smart contracts. You still need them to help you create a contract that is feasible in court.

On the other hand, exposure to bugs is a possible barrier to an effective smart contract. That is because a bug will prevent it from working as it should. Lastly, you need a developer to create a smart contract for you, which could lead to increased costs.

As more development goes into smart contracts, these issues could be solved with time. For now, however, it is satisfying to have a solution to the trust and speed issues we face today when two or more parties are making transactions.

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