What are Smart Contracts?
Smart contracts are, simply put, programs stored on a blockchain that are executed upon the fulfillment of certain conditions (which we’ll talk about later).
But what are they used for?
A smart contract is an agreement between two or more persons, parties, or entities in the form of computer code programmed to execute automatically. This technology was pioneered in the 1990s by Nick Szabo, a pioneer of modern computing.
Szabo defined Smart Contracts as “a set of virtual promises with associated protocols to make them happen”.
We could say that Bitcoin, as a technology that records and records a payment or transaction, can be identified as a v.1 of what a Smart Contract can do.
Transparency of Smart Contracts
Because smart contracts are executed on a blockchain, the terms of such an agreement are stored in a distributed database and cannot be changed. Transactions are also processed on the blockchain, which automates payments and counterparties.
It is since the emergence of the Ethereum network and its digital currency, Ether, that the creation and execution of smart contracts have been simplified, since its protocol allows complex transactions to be programmed.
As mentioned above, the execution of an agreement can be automated so that all participants can be immediately sure of the outcome and conditions, without the intervention of any intermediary and without wasting time.
On the other hand, with a Smart Contract, you can also automate a workflow, triggering a certain action once the programmed conditions are met.
Let’s see how smart contracts work
If you already know how blockchain transfers work, it won’t be too hard to understand:
- First, a user initiates a transaction from his wallet on the blockchain.
- Then the transaction reaches the distributed ledger, where the identity is confirmed.
- The transaction is approved. For example a funds transfer.
- In relation to the previous step, the transaction includes the code that defines what type of transaction should be executed.
- Such transaction is added as a block within the blockchain.
- If there is a need to modify anything in the contract, the same process is followed to update the contract.
What are the benefits of smart contracts?
- Increased security: Blockchain transaction records are encrypted, which makes them very difficult to hack. On the other hand, since each record is connected to previous and subsequent records in a distributed ledger, hackers would have to alter the entire chain to change a single record.
- Faster and more efficient: Once a condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there is no paperwork to process. There is also no time wasted troubleshooting errors that often occur when manually filling out documents.
- Transparency: Since there are no third parties involved, and encrypted records of transactions are shared between the parties, there is no need to question whether information has been altered for the personal benefit of one of the participants.
- Greater Savings and Sustainability: Eliminate the need for intermediaries to manage transactions and their associated delays and fees.
- More Accuracy: Smart Contracts reduce to practically zero the possibility of errors in terms of processing.
Possible applications of Smart Contracts:
Smart Contracts have applications in all areas where traditional contracts are currently signed:
Smart Contracts + Commerce.
Thanks to smart contracts, the time it takes to approve financing for commercial activities can be drastically reduced, which would be a great step forward because this is a time-consuming and resource-intensive process.
Smart Contracts + Registries and Databases
Smart contracts make the storage and maintenance of records and data easier and more secure. For example, The records of billions of users of a social network, or a large amount of patient medical records, must be kept private, and with the ability to be easily updated.
Smart Contracts + Supply Chains
Internet of Things (IoT) devices can be used throughout the supply chain to record every step of a product and improve its traceability. In this way, errors, theft, and loss can be eliminated, for example, in the transportation and logistics industry.
Smart Contracts + Real Estate Market
Smart contracts can be used to register property ownership more efficiently. In addition, their use can extend beyond apartments, buildings, or land and register all types of assets.
Other possible applications for Smart Contracts are employment contracts, election processes, or copyright protection in different industries.
Where to develop and execute a Smart Contract on Blockchain?
Ethereum: This network is the most popular platform for executing Smart Contracts today. In Ethereum, Smart Contracts are written in a programming language called Solidity and executed by the EVM (Ethereum Virtual Machine).
Polkadot: This is an alternative blockchain network, famous for its ability to host parachains or chains within chains, with which we could perform more transactions than usual.
Hyperledger: This is an open-source system developed by the Linux Foundation. It is not a cryptocurrency, but Hyperledger refers to a flexible platform on which smart contracts can be developed.
Counterparty: This platform is open source. This platform incorporates data into Bitcoin transactions. This means, in short, that Counterparty uses Bitcoin’s blockchain technology, and allows contracts to be developed on top of it.
The case studies and applications are endless. If you liked this topic, and want to know more about how Smart Contracts work, read this article: What are Smart Contracts and how they work and follow us on Social Networks so you don’t miss anything.