Everything You Need to Know About Smart Contracts
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You may have heard about smart contracts being mentioned more and more in the recent past and wondering what they are or what they do. Similar to cryptocurrency, smart contracts are built on blockchain technology. This technology is quickly gaining traction in the business world because of its immense capabilities and solutions. As for smart contracts, they eliminate paper processes and provide better guarantees and reliability of contracts. They also offer a way for trustless transactions between involved parties.
But first, look at what smart contracts are before getting into the details of what else you need to know about them.
What is a Smart Contract?
Notably, the first concept of smart contracts was shared by Nick Szabo, an American cryptographer way back in 1994. This was years before the emergence of Bitcoins and the blockchain technology as it’s known today. Today, smart contracts are at the heart of the blockchain and cryptocurrency space.
A smart contract is an application built through blockchain technology and is designed to perform required actions automatically according to the terms set in an agreement. It’s used to execute agreements involving buying and selling, exchanging money, and many other things in digital form.
These contracts are written as codes that are attached to the terms and conditions of an agreement. When the pre-coded action is triggered, the necessary action takes place. The first platform that hosts smart contracts is Ethereum, and there are numerous Ethereum smart contract use cases.
Essential Parts of a Smart Contract
Just like a traditional agreement, smart contracts consist of three critical parts. These are the parties (signatories), subject matter, and terms:
- Parties/signatories: These are all the parties involved in the transaction and are required to put their digital signature to show their approval or disapproval of the terms and conditions stated.
- Subject Matter: This is the object of the contract. It can be a digital asset, property, medical, or business records, etc.
- Contract terms: These are the specific details of what parties want to happen with the subject of the contract. The details should be clear and include conditions, penalties, rules, and any rewards associated with completing the contract successfully.
How Smart Contracts Work
These contracts work similarly to paper contracts but only in the digital form that is more reliable and secure. Developers can create codes from scratch or conduct a smart contract audit to ensure their proper functioning. While traditional contracts have a higher likelihood of manipulation, smart contracts seek to eliminate that. It’s practically impossible to be deceived or scammed when executing a smart contract.
Blockchain technology makes the execution trustless, yet anonymous parties who don’t know each other can transact securely. Each party verifies the contract terms, ensuring that the contract won’t execute unless all the pre-determined conditions are met. There’s no need for third parties to be stakeholders or intermediaries, which eliminates human error, time, and associated costs.
Benefits of Smart Contracts
Smart contracts provide a reliable and seamless way to execute transitions. They facilitate paperless transactions, eliminate intermediaries and offer a secure platform free of human errors. Here are other perks that smart contracts bring.
- Convenience and efficiency
- Trust and complete control of the contract process
- A guaranteed outcome with the ‘if -then’ principle
- Offers strong security and safety
- It saves alot of time and costs
- Accuracy and immutability
Applications of Smart Contracts
While smart contracts are primarily used in the legal and Fin-Tech space, it has wide used across all industries. If you look at some smart contract examples, they show the extent of what these applications can do in various sectors. They also tell how many can benefit from the technology’s immense potential.
These industries include real estate, health, product development, insurance, mortgage, ICOs and crowdfunding, and many others. In addition, smart contracts also enable self-executing workflows that allow the next action to take place according to the set code.
Smart contracts powered by blockchain are enhanced digital agreements that provide more occurrence and efficiency but are still very fast and relatively cheaper. Parties have a guaranteed outcome of what happens when parties either agree or disagree on the terms set. Industries can benefit from this technology with better workflows, quicker actions, secure data storage, and sharing. There is also the elimination of human errors, bias, or manipulation of terms.
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