What Are Smart Contracts
A smart contract is a self-executing contract with the terms of the agreement written into code. It’s a digital contract that can automatically control the transfer of digital assets between parties under certain conditions. The concept of a “smart contract” was first proposed by computer scientist Nick Szabo in 1994, but it was only with the advent of blockchain technology, specifically Ethereum, that smart contracts became a reality.
Smart Contracts Explained Simply
A traditional contract is a legally binding agreement between two or more parties, which sets out the rights and obligations of each party. Smart contracts, on the other hand, are digital contracts that can automatically enforce the terms of the agreement without the need for intermediaries such as lawyers or banks.
For example, imagine you want to buy a house and you have to pay a deposit to the seller. With a traditional contract, you would have to go to a lawyer or a bank to make sure that the deposit is securely held until the completion of the sale. With a smart contract, the deposit can be held in an escrow account on the blockchain, and the smart contract can automatically release the deposit to the seller once the sale is completed.
Smart contracts can also be used to create decentralized applications (also known as “dApps”), which are applications that run on the blockchain. These decentralized applications can be used for a variety of useful purposes.
I’ve written an article about the 5 smart contract uses I’m most excited about.
Read: 5 ways blockchain technology can stomp out corruption
There are a lot more than 5 uses-cases though. Almost every industry can (and likely will) be disrupted in some way due to the invention and application of this technology.
From voting to online marketplaces; supply chain management to insurance – the transition will take time, but it’s seemingly inevitable.
Which Industries Will Smart Contracts Effect The Most?
It’s fairly obvious that the traditional finance industry is living on borrowed time, so to speak, now that smart contracts have enabled decentralized finance (DeFi).
Here are 10 more examples of how smart contracts can change how we interact and conduct business with each other..
- Supply Chain Management: Smart contracts can automate and streamline the tracking and verification of goods as they move through the supply chain. Vechain is tailored certain aspects of their blockchain to cater to this particular use case.
- Real Estate: Smart contracts can automate the buying and selling process of real estate by handling property deeds, title transfers, and mortgage payments. There’s a “dApp” on Ethereum called “Propy” that’s targeting this.
- Insurance: Smart contracts can be used to automate the claims process, reducing the need for manual claims processing and improving the speed and accuracy of payouts.
- Healthcare: Smart contracts can automate the sharing of medical records and the tracking of prescriptions, making it easier for patients to manage their health and for doctors to provide better care.
- Voting Systems: Smart contracts can provide a secure and transparent way to conduct online voting, reducing the risk of fraud and increasing voter turnout. This is an obvious use case, but don’t expect to see this implemented in national elections any time soon as it would make them harder to manipulate. The controllers of the current system like being able to strategically place their “young global leaders” into these positions (look that up if you don’t now what I’m talking about).
- Copyright and Royalty Management: Smart contracts can automate the tracking and payment of royalties for artists, musicians and authors, ensuring they get paid fairly for their work.
- Ride-Sharing: Smart contracts can automate the payment process for ride-sharing services like Uber, Grab and Lyft.
- Energy and Utilities: Smart contracts can automate the tracking and billing of energy usage.
- Gaming: Smart contracts can automate the buying, selling, and trading of virtual assets.
- Retail and E-Commerce: Smart contracts can automate the buying and selling process for online retailers.
How Do Smart Contracts Work From A Technical Perspective
On a technical level, smart contracts are essentially lines of code that are stored on a blockchain network. These lines of code are written using whatever programming language that the blockchain supports. On Ethereum, for example, the smart contracts are written in language called “Solidity”.
The code of a smart contract defines the rules and conditions of the agreement, as well as the actions that should be taken when these conditions are met. For example, a smart contract for a crowdfunding campaign might state that if a certain amount of money is raised within a certain timeframe, then the funds will be released to the project creator. If the fundraising goal is not met, then the funds will be returned to the contributors.
When a user wants to interact with a smart contract, they must submit a transaction to the blockchain network. This transaction includes the necessary data and the address of the smart contract. The network then runs the code of the smart contract and executes the defined actions, based on the submitted data and the current state of the contract.
The nodes on the blockchain network are responsible for executing and updating the smart contract’s code. They also check that the transactions being submitted are valid and the person making them has the proper permissions. Once the code is executed and the contract is updated, the new information is recorded in a block and added to the blockchain, creating a permanent record of all the contract’s actions. Any user on the network can see the current state of the contract.
Quick Summary
Smart contracts are a way for two parties to make an agreement without the need for a third party, like a lawyer or bank. They are digital contracts that automatically execute the terms of an agreement when certain conditions are met. For example, imagine a smart contract that automatically releases payment for a product when the buyer confirms receipt of the product. This eliminates the need for a middleman and helps to ensure that the terms of the agreement are carried out as intended. Smart contracts are set to revolutionize the way we conduct business.
