What Is A Smart Contract?
Tags: Cryptocurrency, Smart Contracts, Bitcoin, Blockchain, Crypto

What Is A Smart Contract?

Source: Pixabay

Blockchain allows two parties to carry out a transaction without the need for a middleman or third party (click here to read Oddup’s Ultimate Guide on Cryptocurrency and Blockchain). This made it an ideal option for contracts, which could be converted to computer code, and then stored on the blockchain, under the supervision of the network of computers connected to it.

This is how smart contracts were developed.

What Is A Smart Contract?

A smart contract is essentially a contract that is developed for implementation on the blockchain. The contract is drawn up and coded, with a set of rules and penalties similar to that of a traditional contract. However, a smart contract goes a step further by being self-fulfilling. As long as the terms within the contract are fulfilled, the contract executes itself.

What varies here is the manner of execution.

How Smart Contracts Work

Smart contracts follow an ‘if ➡ then’ approach.

In a transaction, a buyer pays cryptocurrency to a seller for which he receives a receipt, and the amount is held in the virtual contract between both parties. The seller then provides a key to the buyer, which the latter receives on a pre-determined date.

On the specified date, the contract executes itself in one of the following methods:

The buyer receives the key and the fee is released to the seller

The buyer does not receive the key and the fee is refunded to him

In the event of the seller sending the key earlier, the fee and key are both held until the specific date on which they are both released to the respective parties. When the contract period ends, it is automatically terminated. The most important factor in this transaction is that the contract and its terms cannot be edited or interfered with, without all points of the network being alerted. This massively reduces the possibility of scams and cheating of any form. This security is only one of the many advantages intrinsic to smart contracts.

Advantages Of Smart Contracts

Smart contracts, being implemented through blockchain, have a host of intrinsic advantages. These include:

Trust

By being encrypted on a shared folder, these contracts and documents are well protected, removing the risk of accidental or intentional loss.

Autonomy

The details of a smart contract need to be confirmed only by the persons entering the contract, keeping sensitive data free from the scrutiny and manipulation by third parties.

Reliable

Smart contracts are duplicated across the network of servers, ensuring that they cannot be lost even if a copy is misplaced.

Security

Smart contracts are built on blockchain which is incredibly secure and nearly impossible to hack or manipulate, keeping data and transaction details accurate, original, and immutable.

Automated

Executed through a pre-written code, smart contracts take much less time and effort to be implemented. The process is automated, and this saves numerous business hours, allowing for greater efficiency.

Less cost

Smart contracts have their own cost, but these are generally less than the cost payable to a third party to traditionally draw and execute such a contract. Additionally, the price paid also brings much greater security, trust, and efficiency, making it much more cost effective.

Accurate

Smart contracts are fulfilled on the basis of code. Once this code has been tested and approved, errors are almost impossible. Manual errors during execution, especially, are completely avoided since the process is automated.

Application Of Smart Contracts

Given their many advantages, smart contracts are seeing improved reception in multiple industries. Today, an increasing number of industries, functions, and economic sectors are exploring smart contracts to identify how their business processes can be made more secure, efficient, and cost-effective.

Some of these sectors include government bodies, supply chain management, general business management, real estate, automotive, and even healthcare.

However, smart contracts are yet to achieve mass adoption.

Constraints Of Smart Contracts

Smart contracts, while having the potential to be safer, more effective, and more efficient than traditional contracts, also possess some constraints. The primary one is that of incorrect code.

Smart contracts need to be coded, and this process includes the risk of manual error. Hence, contracts need to be checked and rechecked until developers are absolutely sure that they work. Furthermore, the codes need to be regularly monitored to avoid bugs.

In addition to the problem of incorrect code or bugs in the code, smart contracts also have some other limitations. For instance, how can governments of the countries in which the contract is executed regulate or tax (where relevant) these transactions? Or, what happens if the objects behind a successfully executed smart contract (such as a house in the case of a rental agreement) are altered after entering into the contract, but before it is executed? These problems can adversely affect the successful execution of a smart contract.

Hence, smart contracts hold incredible promise, but unleashing that potential requires a lot of exploration and development.

Future Outlook

The development of smart contracts is greatly dependent on the resolution of their limitations. In fact, improving smart contracts is the only way to evoke mass adoption and understanding of the concept. An increasing number of researchers are focusing on solving the problems that are holding smart contracts back. Additionally, more and more startups are exploring blockchain and its mass adoption, and smart contracts are an integral part of the growth of this technology.

As with blockchain and cryptocurrency, only time will truly tell how receptive the general population will be towards smart contracts.

This article was originally published on Oddup.com and can be accessed here. You can check out the other insights articles on ICO, cryptocurrency, blockchain, investment, and startup culture published by Oddup by clicking here.