As digital programs stored on blockchain networks, smart contracts have a number of advantages and are increasingly being used instead of traditional contracts. When predetermined conditions are met, smart contracts automatically generate results.
This differs significantly from traditional contracts, which require a third party to control and enforce.
Briefly, smart contracts using distributed ledger technology execute on their own. This eliminates the need for intermediaries such as lawyers, brokers, etc. Paper contracts often involve unwanted transaction costs. Widespread adoption of smart contracts for efficient business processes is inevitable.
Smart contracts in the real world
Let's look at an example of a property lease agreement. A traditional contract is created between a landlord and a tenant to define the terms of a lease agreement between both parties. You may have a clause in your contract that requires the tenant to pay rent on the first day of each month.
If the landlord doesn’t receive payment from the tenant on the first day of the month, he will need to have a lawyer enforce the legal agreement. This process often takes months and results in significant costs for the landlord. And if he has a mortgage, a late payment can affect his ability to pay his debts.
But what if the parties agreed that smart contracts would provide payments every month? For example, at the beginning of each month, using distributed ledger technology, a smart contract can automatically fulfill an agreement and transfer money from a tenant to a landlord. The whole process could be done even without the participation of the parties!
What are the benefits of using smart contracts?
Speed and efficiency
When the conditions of the smart contract are met, it will immediately execute the result.Trust and transparency
The code is a contract and it is publicly available on the blockchain for anyone to see.Security
To ensure this, developers typically use an audit service that checks the contract code line by line for potential problems. In addition, data encryption can be used to store transactions on the blockchain to improve security.Accuracy
Smart contracts leave no room for rework or forgery. The computer code in the blockchain is fixed and cannot be changed.Storage and backup
Smart contracts are stored and executed on the blockchain, which is essentially a decentralized, immutable and public database. Blockchain ensures that all transactions are always recorded and visible to the relevant parties.
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