What are Smart Contracts?
By: Zain Ali
Tags: Smart Contracts, Education, Bitcoin, Ethereum, Blockchain

Smart contracts are one of the most important use cases of the blockchain. I know it can be very confusing to understand what and how they work but I believe after you are done with this article you can explain it to your friends yourself.

Smart contracts work with blockchain but it was developed way before blockchain was even considered. In 1994, Nick Szabo proposed the idea of a computer-based contract that can be executed via code when certain criteria are matched. Transactions and agreements could become transparent and free from third-party authorities i.e banks.

His idea could not become reality because there was no such technology to execute this method but now we have blockchain and smart contracts are a reality.

So, now that all the history is out of the way let’s talk about some technical stuff.

How do smart contracts function?

A smart contract is essentially an agreement between two parties and it is fulfilled when both parties have fulfilled their end of the agreement. All of this happens automatically.

Let’s look at an example, imagine Mrbeast (Gaming Youtuber) wants to buy a Minecraft city from Dream (Another gaming Youtuber). Dream asks $20,000 worth of Bitcoin for complete ownership, both parties agree and a contract is created. Now the seller’s end of the agreement is fulfilled when Dream uploads all the required data and credentials for the game city on the blockchain. Similarly, the buyer end is fulfilled when Mrbeast transfers the bitcoin through the contract. All of the validation of data transfer and money transfer is done automatically without any third-party interference, with no commission fee, no delays. Just a smooth deal between two people.

In addition to all these the only people who can make transactions are people who drew the contract and transactions cannot be reversed unless it is mentioned in the contract.

Smart contracts can be built on multiple blockchains e.g. Ethereum and NEO. Ethereum is the most popular choice and developers use its native coding language Solidity to make contracts.

Benefits

Reliability: Smart contracts are more reliable than traditional contracts due to being stored on the blockchain which provides record integrity by storing multiple copies on the network.

Smart contracts are more reliable than traditional contracts due to being stored on the blockchain which provides record integrity by storing multiple copies on the network. Transparency: Contract terms and conditions are available on the blockchain, along with the confidentiality of the parties to the contract.

Contract terms and conditions are available on the blockchain, along with the confidentiality of the parties to the contract. Automation & Efficiency: Smart contracts imposed by blockchain automatically reduce third-party interaction hence improving speed and efficiency.

Smart contracts imposed by blockchain automatically reduce third-party interaction hence improving speed and efficiency. Cost reduction: Because smart contracts are automatic therefore it helps reduce the commission and fee cost of multiple third parties i.e. lawyers, banks, etc.

Drawbacks

Security: Because smart contracts are fairly new and far from perfect, there are some hacking hazards like all technologies. And since these are not backed by any legal or government authority any unfortunate event is the complete responsibility of the contract holders.

Because smart contracts are fairly new and far from perfect, there are some hacking hazards like all technologies. And since these are not backed by any legal or government authority any unfortunate event is the complete responsibility of the contract holders. Alignment: Smart contracts speed up the process automatically but sometimes it processes some steps of the contracts whether it was approved or not by the client. It can occur due to some issue in the code or miss communication between parties but the changes in the contract cannot be reversed.

Smart contracts speed up the process automatically but sometimes it processes some steps of the contracts whether it was approved or not by the client. It can occur due to some issue in the code or miss communication between parties but the changes in the contract cannot be reversed. Management: Another similar issue is with contract structure. It is designed to be immutable therefore any changes or addition in the contract policies are impossible and a new contract has to be created every time there is a change.

Uses of Smart Contracts.

The possibilities of smart contract applications are endless. They are already being used for financial trades and services, insurance, credit authorization, legal processes, and ICOs.

Let’s look at how it is being and will be implemented in the industry.

Healthcare:

Healthcare systems will use smart contracts to record and safely transfer data. One of the major examples is EncrypGen a company that uses smart contracts to transfer medical and personal data of patients.

This allows clients to control who accesses and uses their data. They can even charge if they want to.

Government:

The one many uses of smart contracts for the government is the voting system based on it.

Applications like FollowMyVote use smart contracts and blockchain technology to protect votes from fraud. Since data on the blockchain cannot be changed therefore once votes have been cast there is no way to alter the result hence always a fair winner.

Business:

Smart contracts can be beneficial for businesses by automating time-consuming and repetitive tasks.

For example, salary payments can be done via smart contracts by creating a contract with conditions such as “Pay 3ETH to the employee no: 258533 on 31 July 2021.”. This way employees will be automatically paid and records will be secure on the blockchain.

Initial Coin Offering (ICOs):

An ICO is a crowdfunding system for new blockchain technology applications. You create a smart contract and a token for that smart contract.

Suppose you create a token called Batsy. You want to raise money to start your project, Let’s assume you need $10,000,000 which is 10,000 ETH (assumption). Now you will sell 100000 Batsy tokens for 0.1 ETH on a crypto exchange.

Hopefully, everything went well and you sold all the tokens then you’ll have 10,000 ETH that is your starting amount of $10,000,000.

Now you are wondering why anyone would buy my token. There are two most common reasons why people buy tokens.

The token can be used on the application to which it belongs. The token can increase in value when the project gains popularity.

Conclusion

In the end, smart contracts prove to be efficient, reliable, and cost-reducing. It removes middle manship, hidden commission, and delay.

Smart contracts also seem to be effective in practical industries as mentioned above. Once it is completely adopted the work process of our daily life would change completely.

The only downside is that it is still vulnerable to cyber-attacks which can be a hurdle in mass adoption but there is no denying that it is far better than current methods.