In addition to cryptocurrencies, another widespread innovation called smart contracts runs in the family of blockchain technology. They make way for less paperwork, more guaranteed and reliable agreements, and trustless transactions between the parties involved. But before discussing how they can do all these, let’s first take a look at what they are.
What is a smart contract?
American cryptographer Nick Szabo first shared the concept of smart contracts in 1994—one and a half decades before Bitcoin’s birth. Fast-forward to today; they have become very popular in the cryptocurrency and blockchain space.
A smart contract is an “application or program that runs on a blockchain,” or the powerful technology behind thousands of digital currencies today like bitcoin (BTC). It’s a program or protocol designed to perform necessary actions according to terms of an agreement automatically. It works like a typical agreement or contract used for buying or selling properties or cars, exchanging money, and a lot more—but in digital form.
In the blockchain space, smart contacts are written as codes. These codes, along with the terms and conditions in the contract, are publicly available on the decentralized and distributed ledger that records transactions or blocks.
When the outlined event or expiration date in the smart contract is triggered, the code or agreement will occur. In fact, Ethereum (ETH) is the first cryptocurrency that hosts smart contracts executed within the Ethereum Virtual Machine (EVM). The EVM provides a runtime that will perform the code or agreement written in the contract.
Three essential parts of a smart contract
Like any other contract or agreement, a smart contract comprises three important components—signatories, subject, and terms. Let’s briefly define each.
- Signatories. All parties involved in the agreement will have to put their digital signature on the smart contract, as these will imply their agreement or disagreement with the terms and conditions stated in it.
- The subject of the agreement. This refers to the object or subject of the contract. This can be a car, real estate property, or medical records, to name a few.
- Specific terms. These terms must be specific, clear, and include all the rules, penalties, and rewards associated with the said agreement.
How do smart contracts work?
We mentioned earlier that this technology works like any other agreement but in a digital and more reliable form. Sometimes, people get scammed or deceived by their trade or transaction partners, and that’s one of the many things smart contracts aim to get rid of.
Smart contracts facilitate “trustless” agreements, which means the parties involved don’t have to know each other to establish trust and confidence. Each party can make commitments or agreements through blockchain, which will ensure that the contract won’t push through without the fulfillment of the conditions stated.
There won’t be any third parties or intermediaries needed to run and secure the contract, which means that there will be lesser human errors and reduced operational costs.
What do smart contracts give you?
Earlier, we discussed that smart contracts facilitate paperless and reliable transactions, so let’s take a look at the perks it can give you.
Efficiency and convenience
Processing documents manually—usually with piles of papers—can be tedious and time-consuming. There’s also a possible risk of getting your documents misplaced or stolen if not kept in well-secured storage. With smart contracts, documents and other essential data are recorded digitally, making record tracking easier and more efficient.
Trust and full control of the agreement
Your documents are kept on a secure, shared ledger—not in someone else’s cabinet or vault. Smart contracts don’t need to be run or monitored by intermediaries, which means you have full control of the agreement. The blockchain also ensures that all data provided by both parties are accurate.
Smart contracts also work as an escrow service that holds the money and ownership rights in a secure and automated system, until the time agreed upon by the parties involved. It can be programmed with the functions of an intermediary, for example, and works on an “if-then” principle.
For example, if a real estate buyer completes payment to the property, then the property owner will release the title and keys to the buyer.
Safety and strong security
With smart contracts, your agreement is encrypted. It uses complex cryptography so it can’t be easily accessed and is extremely hard to be hacked.
Save some money
Since they don’t need intermediaries, no real estate agents, financial advisors, notaries, or other possible third parties will be required—this means you won’t have to pay so much for these service providers. Add that to your savings and spend your money in much-needed situations!
Where can you use smart contracts?
While this technology is widespread in the fintech space, its uses can benefit a wide range of industries. Here’s a list of where you can utilize its remarkable potential.
This is among the first of the many places you can utilize a smart contract. From properties such as real estate properties, cars, and jewelry, using it cuts off the need for the expensive services provided by housing brokers and lawyers. Property buyers can seal the deal all by themselves.
Hospitals worldwide have tons of medical records that must be kept confidential and only available to patients, their families, and healthcare providers. Like banks and other institutions that hold sensitive information, hospitals are susceptible to data breaches and cyber-attacks. With smart contracts, patients’ health records are kept encrypted and safe, and only specific individuals can gain access to sensitive data.
Peer-to-peer (P2P) transactions
Smart contracts can be customized to the needs of the company, individual, or business that needs it. Platforms can create it, set rules and conditions, and utilize it for various activities and transactions.
Aside from what we listed above, smart contracts are also used in product development, vote recording, medical research, insurance processing, and mortgage transactions, among others.
To put it briefly
This technology works like a digitized agreement—but more accurate and efficient, cheaper, and faster. It is guaranteed by an “if-then” principle that signals when the agreement should proceed or be terminated.
If a lot of industries and businesses adopt this technology in the future, transactions and agreements, as well as data storage and sharing, will be more secure and reliable in the many years to come.