Like many ideas in the blockchain industry, a general confusion shrouds the term “smart contracts”.
While blockchains give us distributed trustworthy storage, smart contracts give us distributed trustworthy calculations. They have bought a seismic change in the way the world currently operates.
So, what exactly is a smart contract?
A smart contract is a virtual agreement that directly controls the transfer of assets or digital currencies between parties signing the contract, under certain conditions.
Precisely, smart contracts are self-executing contracts that are programmed to help you exchange anything of value in a conflict-free, transparent blockchain-based network. They are secure, digital, efficient and eliminate the go-betweens.
A smart contract runs on top of the blockchain network, so they are stored on a public database and cannot be changed. The parties signing the contract agree to follow a set of rules. If and when these predefined rules are met, the agreement is enforced automatically. Also, smart contracts are legally binding and secure.
Well, if you are still using the old-school approach for binding agreements, it is high time you switch over to a secure, efficient and transparent network.
Old school approaches like paper contracts or digital contracts will cause you more harm than good. Paper contracts involve multiple rounds of negotiations, several intermediaries and a lengthy administrative process. Whereas, digital contracts are easy to forge, although they are a quick alternative to paper contracts.
So, is there a way out?
Yes. The only way out is to use blockchain based smart contracts.
These smart contracts are basically stand-alone scripts written in Solidity, a contract-oriented programming language. These codes are compiled into JSON or binary format and then deployed to a specific address in the blockchain network.
However, designing and programming smart contracts is a complex process. There are multiple steps involved when it comes to smart contract development. So, you need to take hire the best smart contract developers when you take the decision to migrate to smart contracts.
Attributes of smart contracts:
There are six attributes that smart contract developers focus on while deploying smart contracts:
- Agreement identification- It involved finding cooperative opportunities for all the parties involved. Also includes the potential terms of transfer of rights and the conditions for swapping assets.
- Setting the conditions- Setting the asset allocations conditions in case there are event-based triggers like a natural disaster or death.
- Coding the business logic- The fully automated logic code that is triggered when certain conditions are met.
- Digital signature- Setting up the digital signature for all the parties involved when there is a release of payment or message verification is required.
- Executing processes- After the authentication and verification, the smart contracts are in the execution process where the outcomes are recorded for audit and compliance.
- Updating the network- After the smart contract is executed, each distributed ledger node is updated with the same state. After that, only the new updates can be added to the contract.
How do smart contracts work?
- The agreement
The agreement basically has all the terms and conditions that the parties signing the contract have agreed upon. Now, this agreement also includes the terms that decide how the profits have to be divided and if at all the business incurs any losses, the percentage to be borne by each party. Now, these kinds of conditions are presented and both the parties digitally sign the contracts.
2. Defining protocols
The smart contract is defined in human readable lines of code. The code contains all the outcomes and conditions of the agreement. Generally, an algorithm is developed so as to define when and why a case can be true and how the payments should be released. After that, a software converts the code into a binary format for the machine to interpret.
3. Exclusion of third-party
Smart contracts are also known as self-executing contracts because there is no third-party involved. Smart contracts are programmed such that once all the necessary conditions are met, the contracts are executed automatically.
Why should you switch over to smart contracts?
Businesses are switching over to smart contracts as they provide offer a host of advantages over traditional contracts. Here are the core benefits that smart contracts offer:
- Certainty: As smart contracts are written in codes, there is no room for any ambiguity and discrepancy.
- Safety: Smart contracts, encoded into the blockchain network are secure and safe as smart contracts are encrypted and distributed.
- Automation: These smart contracts are accurate and secure. It removes the need for wait time and gives instant results. The entire process is automated.
- Immutable: a smart contract can never be tampered with or broken, so, essentially, it is immutable
- Cost: As there is no human involvement, there are no operating or record keeping costs. Hence, smart contracts are cost-effective.
- Guaranteed outcomes: Smart contracts have the potential to significantly reduce the need for litigation and courts
- Transparency: The terms and conditions of the contract are fully visible and accessible to all the concerned parties.
- Processing speed: Smart contracts run on automated processes and in most cases, eliminate human involvement. This increases the speed of transactions that are stipulated in the contract.
- Distributed: The outcome of the contract is validated by all the involved parties similar to blockchain based transactions.
- Fraud detection: The contracts are kept in a chronological order and each record is validated so there is no scope of fraud or data stealing.
To sum up:
The applications of the smart contract are not just limited to the financial sphere. Practically, every industry, be it real estate, supply chain management, healthcare, insurance, education sector, eCommerce can use smart contracts for their business. The possibilities are endless.
Although they are relatively new, businesses are slowly and gradually adapting to smart contracts. They promise security, accuracy, standardization, economy, speed, independence, trust quotient, data storage and savings.
In addition to that, smart contracts are self-verifying, self-executing and tamper resistant. They are also capable of tracking performance in real time.
Simply put, smart contracts tighten the laces of existing processes and allow for more autonomy.