Traditional manual tasks are being revamped to incorporate modern technologies as the world shifts toward digital and automated processes. For example, smart contracts that use blockchain technology may replace traditional contracts in the future.
A contract, in general, is a written and signed agreement between two parties on a set of terms. A smart contract is a digital contract written in the form of a computer program that will be executed once certain conditions are met. They are useful in a variety of transactions, from simple ones like dispensing a bottle in a vending machine to more complex ones like real estate or supply chain.
What Exactly Is a Smart Contract?
Smart contracts are digital contracts that are written in computer code and defined. Furthermore, when the terms of a contract are met, they automatically self-execute, eliminating the need for manual intervention. Smart contracts have recently gained popularity as a result of blockchain technology, which offers unprecedented levels of security and immutability. Smart contracts use the distributed and decentralized network of the blockchain to store and execute the code written within them.
Smart Contract Types
In-code contracts are fully programmed smart contracts. Auxiliary contracts, on the other hand, supplement text-based agreements and automate parts of the transaction.
How Do Smart Contracts Function?
On a smart contract platform, programmers create smart contracts with the necessary data inputs and security measures. They are then deployed and encrypted on a smart contract blockchain such as Ethereum. The contract is then ready to go, pending the fulfillment of its given conditions. When the conditions are met, the smart contract will act (execute) in accordance with the contract’s instructions.
Contracts can also, if specified, invoke other contracts, and all transactions are recorded on the blockchain. These contract transactions are immutable and cannot be changed once they have been recorded on a network, providing a high level of security.
Smart contract use-cases include assisting in the identification of payments, fulfilling orders, settling insurance claims, and defining financial market actions.
Smart Contracts on Ethereum
Ethereum is a permissionless blockchain network that went live in 2015. It rose to prominence due to its cryptocurrency token, Ether. Because of its large developer community, the Ethereum network is now the go-to blockchain network for smart contract deployment. Furthermore, Ethereum’s network is faster than Bitcoin’s network. Solidity is the programming language used to create Ethereum-based smart contracts.
Benefits of Smart Contracts
- Automated: The contract’s execution is digitally automated, with no manual actions involved.
- Efficient: The absence of a third-party or central agency makes performance much more efficient compared to traditional contracts. Furthermore, contracts are immediately executed once conditions are satisfied.
- Programmable: Contracts become programmable and can be modified or replicated at scale.
- Trust and Transparency: Blockchains like Ethereum publish transaction data publicly, building trust among contract stakeholders.
- Traceable: All contract executions and transactions are permanently recorded in the blockchain’s network, allowing traceability of events.
- Secure: Neither the smart contract nor transactions on a network can be modified or deleted, as the records are immutable on encrypted smart contract blockchain networks.
- Cost-effective: Smart contracts eliminate the presence of intermediaries who charge fees.
- Independent: Smart contracts do not require a central authority, legal system, or external enforcement mechanism. However, they can help map legal requirements into an automated process.
Smart Contract Applications
Smart contracts can be used for a variety of transaction-based scenarios in any industry. For transactions, cryptocurrencies employ a preliminary form of smart contracts. Some notable smart contract use-cases are:
- Supply Chain: Supply chain and logistics involve the movement of goods and the responsibilities of various participants. Smart contracts can be used to help automate this complex process.
- Vendor Relations: Vendor relations, like buyer-supplier, involve contractual agreements that can be deployed as smart contracts.
- Financial: A wide variety of DeFi applications are built with smart contracts. Scenarios like releasing payments or funds based on conditions or financial penalties levied for specific events, actions, or results can be smartly contracted. This allows for fast and secure processing.
- Real Estate: The costs, delays, and ownership criteria in real estate transactions can be written as smart contracts to reduce expenses and increase efficiency.
- DAO: Decentralized autonomous organizations (DAOs) are a collective of users representing a virtual organization without any central authority. A DAO’s community rules and protocols are coded into a smart contract blockchain platform, allowing the organization to operate without human oversight.
Smart contracts are playing an increasingly significant role in business. Though we are still in the early days of blockchain-based smart contract adoption, companies recognize the multitude of use-cases for the technology and the benefits they provide. Their greater efficiency, security, reduced costs, decentralization, and more make smart contracts highly desirable to businesses willing to adopt the emerging technology. As the blockchain continues to gain traction, smart contracts will likely become more prevalent in everyday business operations, and new use-cases will continue to emerge.