The growing popularity of cryptocurrencies has thrust a new set of jargons onto investors. Tokens, blockchain, smart contracts, decentralised apps etc., are becoming a part of our everyday vocabulary on cryptocurrencies or specific platforms.
I know that these terms may sound like complex jargons, but the truth is that they are actually simple concepts to understand.
The blockchain technology underpinning the first original cryptocurrency ‘Bitcoin’ has evolved two more generations since its inception.
Ethereum, the second generation blockchain used to create smart contracts, is bringing forth strategic evolutions across multiple industries, including finance, insurance, healthcare and more.
But what are smart contracts, and how do they work?
Let us find out.
Table of Contents
What are Smart Contracts?
How Do Smart Contracts Work?
Types of Smart Contracts
Key Benefits of Smart Contracts
Wrapping Up
What are Smart Contracts?
Smart contracts are self-executing programs stored on a blockchain that run when pre-defined terms and conditions are met.
In other words:
They are a set of computer codes that run on blockchain technology. And constitute a set of pre-defined rules which are agreed upon by the involved parties.
Smart Contracts help verify, enforce, and execute digital transactions without third parties’ involvement once these predefined rules are met.
Simply put:
Smart contracts are designed to eliminate the need for middlemen such as a lawyer or a bank representative for getting a job done. The terms of agreement and contracts are written directly into lines of code. Upon fulfilment of the conditions laid out, the smart contracts self-execute the transaction.
The corresponding agreements and code are stored on a decentralised and distributed blockchain network. This means the transactions can be easily tracked in real-time by the involved parties and are irreversible.
Thus, you don’t need a central party to intervene in the agreement, and the system remains conflict-free and transparent.
Smart Contracts for cryptocurrency and digital tokens make the transfer between the buyer and the seller possible once the transfer conditions are met.
How Do Smart Contracts Work?
Let’s look at an example to understand how these contracts work.
Suppose you are selling a house property. This is a cumbersome and time-consuming process involving a lot of paperwork. Not to forget the constant back and forth over calls to communicate any developments.
Plus, if you hire a real estate agent, it brings in a possibility of risk, frauds or scams as they are responsible for overseeing your deal. Taking into account that they charge you commission and involve an escrow service to ensure the transfer of funds from one party to another. These cuts can add up to a lot of extra loss of money for you as a seller.
Now, imagine a world where you could sell your property without a real-estate agent and an escrow service agency. Enter Smart Contracts.
Smart contracts work on a simple condition-based principle, “if/when….then” lined into codes on a blockchain.
Referring to the example cited above, you could establish a smart contract with pre-defined rules like this:
“if/when Mr A pays the agreed property amount, then I can transfer the property in his name.” Or, “if/when I transfer the property in Mr A’s name, then he will pay the agreed property amount.”
You can include as many terms and conditions as you want in a smart contract. And can code all the functions of a real estate agent into a smart contract. Once all the requirements are met, the smart contract executes and validates your digital
transaction.
Types of Smart Contracts
There are many types of smart contracts, including:
Smart legal contracts
These are the most common types of contracts. Most contracts are enforceable by law. Without delving into the technicalities, smart legal contracts involve strict legal consequences if the parties involved fail to fulfil their contractual obligations
Decentralized Autonomous Organizations (DAO’s)
DAO’s are generally communities that exist on the blockchain. These communities may be defined by a set of rules made up and put into code by multitudes of smart contracts.
Application logic contracts (ALCs)
These contracts are built upon application-specific code designed to work together with other programs and smart contracts on the blockchain.
Since this concept is currently dynamic, all the definitions may be fluidic and vague at best.
Key Benefits of Smart Contracts
Listed below are the top advantages of smart contracts:
Speed
Smart contracts eliminate the need to manually process every document as it is a distributed network that works online. This can speed up the execution process.
Transparency
Before the smart contract is coded, all the agreement rules are doubly checked by the involved parties. This ensures transparency.
Accuracy
When you switch to smart contracts, there are no more manual form fillings. A self-executing smart contract is coded in an exceptionally detailed form which ensures better accuracy.
Savings
As the middlemen and third parties get eliminated from a smart contract. You can significantly save on transactional and operational costs.
Secure
You don’t have to worry about any hacks or breaches for smart contracts. They are built using supreme data encryption technology, offering the highest security levels.
Paperless
Since smart contracts are computer coded documents, there is no documentation involved in the process. This not only saves time but also contributes to the ‘go green’ initiative.
Data Storage
Smart contracts come with easy storage and backup options that cover you in the rare event of a data loss. Your data stays secure at all times, and you can access it any time of the day. Even if you lose it by accident, you can restore it quickly.
Trust
As we learned, smart contracts don’t involve any third parties. Since its transactions are highly encrypted and shared across on a decentralised platform, it helps build trust. There is no need to question whether any involved party has altered information for personal benefit as smart contracts are irreversible.
Time-efficient
Smart contracts are run through pieces of software code, ensuring the transactions get completed fast. There are no human delays caused by intermediaries or mediators, making them time-efficient.
Wrapping Up
The future of the contracts world is headed towards smart contracts. They can bring revolutionary changes to the way business is currently being done using traditional systems.
it is for this reason and more that use cases for smart contracts have been evolving globally. By the end of 2023, the global smart contracts market is expected to reach approximately US $300 million with an annual growth rate of up to 32%.
Suppose you wish to keep pace with the technological advancements and make your business more seamless. In that case, a smart contract offers a fitting solution.
educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.