Blockchain is changing our business practices and everyday life. Smart contracts, which are programs stored in the blockchain, can reduce time and costs and optimize transactions. This article will examine the advantages of smart contracts, their trust-shifting capabilities, and some potential use cases.
Smart contracts are contracts created and executed on Blockchain. The digital contracts protocol aims to simplify, improve reliability, and make traditional contracts and negotiations easier. Smart contracts on the blockchain enable reliable and long-lasting transactions without requiring third parties to act as intermediaries.
Smart Contracts: What Are They?
Smart contracts can be defined as computer programs that are stored in a Blockchain. Ethereum is currently the biggest Blockchain to support smart contracts. Smart contracts can be created in Solidity, a programming language developed exclusively for Ethereum. It is similar in syntax to Javascript.
Smart contracts work like vending machines, where goods are purchased based solely on their displayed prices without intermediaries. Smart contracts require the payment of a "gas" fee (the amount users must spend to complete a transaction). Code is used to execute the contract.
Blockchain is also used to run smart contracts. Look at the appearance of Blockchain-based Smart Contracts. Let's use a ridesharing company as an example. This company keeps the application's data on its servers, which is costly. The data would cost less if an Ethereum-based innovative contract platform stored it.
Smart Contracts Types
What types of smart contracts are there? Let's explore:
1. Smart Legal Contracts
The parties must fulfill the contractual obligations. They can be subject to legal penalties if they do not comply.
2. Decentralized Autonomous Organizations (DAOs)
Smart contracts are the backbone of Decentralized Autonomous Organizations (DAOs). Contracts are bound by rules incorporated in blockchain contracts and then combined with governance systems. The use cases are varied and can range from simple to complex, depending on how many stakeholders there are. Each action performed by community members is also replaced with an automatically enforced code.
3. Application Logic Contracts
ALCs are another type of smart contract that can be found on Blockchain. That allows devices to be run independently and safely, with higher automation and lower transaction costs. They include code that is generally in line with the other contracts on the blockchain. This technology also allows communication between Internet of Things devices (IoTs) and Blockchain.
Smart Contracts: A Brief History
Nick Szabo was the first to propose intelligent contracts in 1994. He is an American computer scientist who created virtual money called Bit Gold in 1998, ten years before Bitcoin. Szabo has been rumored to be the true Satoshi, an anonymous Bitcoin creator, but he denies this.
Szabo defines intelligent contracts as computerized transaction protocols that carry out the terms of the agreement.2 Szabo wanted to expand the functionality of digital transaction methods such as the POS (point-of-sale).
Szabo proposed in his paper the implementation of a synthetic asset contract, which would include derivatives, bonds, and futures. Szabo stated, "These new assets are created by combining derivatives, such as options and futures, with securities like bonds in various ways." The computerized analysis allows complex payment terms to be incorporated into standard contracts. Szabo made many predictions that came true before blockchain technology. For example, most derivatives trades are now conducted via computer networks and complex terms structures.
Smart Contracts: How They Work
The smart contracts are based on simple "if_when_then " statements written in code and stored within a blockchain. When predetermined conditions are met, a network of computers will execute the action. That could be releasing money to the appropriate parties, registering vehicles, sending notifications, or issuing tickets. When the transaction has been completed, it is updated on the blockchain. The marketing cannot be altered; only those granted access can view the result.
In an intelligent agreement, participants can stipulate as many conditions as they need to be satisfied that the job will be done satisfactorily. Participants must agree to the transactions' rules by deciding how they are displayed on the blockchain. They also need to explore possible exceptions and create a framework to resolve disputes.
After that, a developer can program the smart contract. However, many businesses that use blockchain technology to conduct business provide blueprints, online interfaces, and various other online resources that make constructing blockchain-based smart contracts strategy:
Step 1: The business teams work with the developers to determine what behavior they want smart contracts to exhibit in response to specific events or situations.
Step 2: Simple events include, for example, a payment authorization, a shipment receipt, or a utility meter threshold.
Step 3: Complex operations such as automatically releasing an Insurance payment or calculating the value of derivative financial instruments can be encoded with more complex logic.
Step 3: To create the business logic, developers use an intelligent contract-writing platform. The application will be sent for testing by a different team after it has been written.
Step 4: You could use an internal expert or even a firm specializing in smart contract security.
Step 5: The contract is then published onto an already-existing blockchain system or another decentralized digital ledger after being accepted.
Step 6: When the smart contract is implemented, it is configured to receive updates to events from a data stream source called an "oracle," which is encrypted.
Step 7: Once the requisite combination of events has been gathered from one or more oracles, the smart contracts are going into execution.
Related:- A Comprehensive Guide about Smart Contracts in Cryptocurrency
Smart Contracts Have Many Benefits
1. Accuracy, Speed, and Efficiency
The contract will be executed as soon as the condition has been met. Intelligent contracts are digitized and automatically generated, so there is no need to deal with the paperwork and time-consuming reconciliation of errors.
2. Transparency and Trust
A third party may have altered the information.
3. The Security of Your Own Home
Blockchain transaction records are encoded, making them extremely difficult to hack. Each form on a distributed database is linked to previous and following records, so hackers would need to modify the whole chain to change history.
4. Save Money with Savings
Smart contracts eliminate the need for intermediaries to manage transactions and their time delays and associated fees.
Smart Contracts: Applications
- Real estate: Distribute money between parties involved and reduce the amount paid to the intermediary. A smart contract could be used to give the owner of an apartment ownership once specific resources are transferred into their account (or wallet).
- Vehicle Ownership: A blockchain can track vehicle ownership and maintenance. Intelligent contracts can enforce, for instance, vehicle maintenance every six months. Failure to do so will result in suspension of driving license.
- The Music Industry: The music industry could store ownership information in a Blockchain. The blockchain can contain an intelligent contract that credits royalties to an owner's account if the song is commercially used. That can be used to resolve ownership disputes.
- Elections for government: After the votes have been logged on the blockchain, it will be difficult to decrypt and change the voting address, leading to greater confidence in preventing ill practices.
- Management: The Blockchain application for management can automate and streamline many late or delayed decisions. Each decision is made transparently and can be accessed by anyone with authority (an application running on the private blockchain). A smart contract, for example, can trigger raw material supply chain management when 10 tonnes of plastic bags are manufactured.
- Health: Automating healthcare payments using smart contracts will prevent fraud. The ledger records every treatment, and the intelligent contract calculates the total of the transactions at the end. Smart contracts can code that the patient cannot be released from the hospital unless the bill is paid.
Smart Contracts Features
Here are some of the essential features that make up a smart contract:
- Distributed: Everybody on the network has a copy and cannot change the contract's conditions. All nodes on the network replicate and distribute a smart contract.
- Deterministic: Smart contracts only fulfill their functions when all requirements are met. No matter how the innovative agreement is executed, its final result will remain constant.
- Unchangeable: Once deployed, smart contracts cannot be altered. They can only be deleted if the functionality has been implemented before.
- Autonomy: No third parties are involved. You make the contract and share it with your partner. There are no intermediaries, which reduces bullying. The parties involved have complete control. The smart contract can be maintained by the entire network and is executed at all nodes. That removes all power from one party.
- Smart contracts can be customized: Smart contracts are customizable or modified before launch.
- Transparent: Smart contracts are stored in a distributed public ledger called the blockchain. Anyone can view the code, regardless of whether they have participated.
- Untrustworthy: These cannot be relied upon by a third party to confirm the validity of the processes or compliance with the requirements.
- Self-Verifying: These are automated self-verifying.
These are automatically enforced when all conditions are met.
Smart Contracts: Their Capabilities
- Accuracy: Smart Contracts are only accurate if they have been coded by a programmer to be executed.
- Smart contracts: Smart contracts automate tasks and processes previously done manually.
- Speed: Smart contracts software uses code to automate processes, reducing the time required to navigate through the various human-interaction-related processes. The smart contract code executes in real time, so the total time to complete all tasks equals the time it takes to code everything.
- Backup: Each node on the blockchain keeps the shared ledger and provides the most reliable backup.
- Security: Cryptography ensures that assets are secure and safe. Hackers will still have to change all blocks after the modified block if they break the encryption. Please note that this task is challenging and computation-intensive and practically impossible for a small or medium-sized organization.
- Save money: Smart Contracts save you money by eliminating intermediaries. The paperwork costs are minimal or even zero.
- Stores and manages information: smart contract stores data about applications, such as domain registrations, membership permanent records, etc.
- Multi-signature accounts: Smart contracts support multi-signature accounts to distribute the money as soon as all parties confirm the contract.
Smart Contracts: Use cases
Smart contracts are used for financial transactions such as trading, lending, or investing. They can also set up entire companies or industries such as gaming, real estate, healthcare, and healthcare. These industries are built around these algorithms, rules, and engagement metrics.
Banks can use smart contracts to automate debt or transactions. This technology allows insurance companies to optimize specific requirements. For example, if a contract specifies that an insured will receive an exact amount in the case of a particular event. The client does not have to take action or contact the insurance company; money will automatically be credited to their account.
Due to the automatic nature of these contracts, they are better suited for specific industries. Automated arrangements could be better for sectors with high digitalization, such as hotels, restaurants, and hospitals.
Smart contracts can also be beneficial to the following industries:
- Start-ups
- Venture Capital
- Supply Chain
- Charity
- Education Institutions
- Transport & Logistics
- Stores
- Travel & Tourism
Smart Contracts: Benefits for Business
Many people still need to clarify why intelligent contracts have become so popular, despite using formal legal agreements for many years. Smart contracts offer several advantages over conventional arrangements. This number is expected to increase as technology improves. Smart contracts have many benefits.
1. HealthCare
Smart contracts can help solve the problem of medical record management. Intelligent contracts can speed up the insurance claim process and give the public access to data collected from different institutions. The information can be used by customers and transferred quickly if needed. Encoding and storing records of health on Blockchain increases privacy and confidentiality because data can't be altered. The decentralized blockchain allows healthcare professionals to track the supply of drugs, medical items, and test results.
2. Don't Allow Third Parties
The uniqueness of smart contracts is that no third-party involvement is required to run them. This technology saves money and reduces risk by eliminating intermediaries. In real estate, for example, fees can be very high. Blockchains eliminate intermediaries.
3. Maximizing Management
Any organization can find management and operations a slow, tedious process. This process is also susceptible to mistakes. Intelligent contracts can positively impact the world by automating data and information, streamlining communication, and streamlining processes. That can reduce errors and delays in processing.
4. Transparency
Smart contracts cannot be reversed once they have been created. Nobody can alter the code without your knowledge. The output contract is verified by everyone connected to the system. The scam will be impossible to pull off, as someone is sure to catch the fraud and flag it. All parties can see and access the terms and conditions in intelligent contracts. There is no disagreement once the warranty is created. All parties are guaranteed complete transparency.
5. Minimizing Costs
Eliminating intermediaries has other benefits. The costs are reduced because there is no need for a third party to verify the contract terms and provide the necessary confidence. This contract type does not charge intermediary fees.
6. Speed
Many industries are attracted to eliminating manual document processing because it will save them time. The traditional way of completing a deal can take weeks or even months. Simple, smart contracts can solve this problem. Using computers to eliminate paperwork is a great way to reduce the amount of paper.
Intelligent contracts are code-based and available on the Internet. The transactions can be completed at a record-breaking speed. This factor accelerates traditional business processes, bringing buyers and sellers together more directly and quickly than ever.
7. Trust and Security
Modern cryptocurrencies use the most robust data encryption available. This level of encryption makes them among the most specific items on the internet.
Smart contracts offer complete confidence in the performance of their contract. The agreement is transparent, secure, and autonomous, which eliminates any possibility of bias or manipulation. After the announcement, the network automatically fulfills its contract. The parties are bound to follow the rules and definitions of the codebase by using an automatic agreement. If not eliminated, the need for a court case is significantly reduced.
8. Better Banking
Intelligent contracts are beneficial in banking transactions, such as mortgages and loans. Blockchain technology has a significant impact on this field. Banks and other financial organizations will benefit from implementing smart contract technology by automating and carrying out operations more accurately.
9. Improving Political Operations
Smart contracts can improve the voting system in the United States. Smart contracts and blockchain can digitalize traditional voting to eliminate any possibility of error. By transferring votes online, voters can increase their election participation by staying in line and filling out forms at polling stations.
10. Intelligent Supply Chains
Blockchain technology can add transparency to any supply chain, regardless of the industry or company. Smart contracts are one such example. Smart contracts eliminate errors in writing on paper and can streamline long-channel approval processes. The supply chain will benefit from reduced fraud, loss of inventory and information.
11. Automobile Safety
Smart contracts can even change auto insurance rates. They are used in the auto industry to protect developing technologies like self-parking, self-driving vehicles, and other similar ones. Intelligent contracts can pinpoint faults and failures in sensors and detectors. The insurance rates of automobiles can vary depending on where the car is located and its condition.
12. Transforming Real Estate
Internet platforms have revolutionized the way that people search for and purchase housing. Blockchain ledgers can reduce costs for searching for and selling property. Renters and purchasers can pay using bitcoins or other crypto-currencies and encode contracts in the catalog.
Use Cases:
- Other contracts can benefit from smart contracts. Consider, for example, a smart contract that sends funds to A within ten days. The intelligent contract above will run another smart contract after ten days to check if the funds required are present in the account of party A.
- The reports can be set up to allow for a multi-signature system', where assets will only transfer when a specific percentage of users agrees.
- Smart contracts are a way to automate converting legal obligations into smart contracts.
- Smart contracts, if appropriately implemented, provide greater contractual security.
Smart Contracts and Voting on Blockchain
Blockchain can be used to eliminate many common voting problems. When tracing votes, a centralized system has issues - such as identity fraud, incorrect counts, and bias from voting officials. Smart contracts allow predefined conditions and terms to be pre-set into the contract. Voting is only possible with the voter's own digital identity. It is impossible to make a mistake.
Each vote is recorded on the blockchain, and counting occurs automatically without any interference by a third party or reliance on manual processes. Every ID corresponds to one vote. The users of the blockchain network themselves validate the votes. The voting can take place in either a public or decentralized blockchain. The ledger records every voice, which cannot be altered. This ledger can be audited and verified by anyone.
Smart contracts let you create voting systems where you can change the voting rules, add or remove members, alter debating times, and change majority rules. You can, for example, create a voting system within an autonomous decentralized organization. Instead of a central authority making the decision, an internal voting system can decide whether or not the proposal will be accepted.
The Bottom Line
Smart contracts are the future of innovation. They can reduce indirect costs by billions and make the system more efficient. Smart contracts are simple. In the absence of specific regulation, this technology's widespread adoption will force the government to amend both the Indian Evidence Act of 1872 as well as the IT Act. The business and legislative sectors have progressed, but there is still a long way to go. The law still plays a part in the clever contract concept, but it is a gray area. It takes an enormous effort to create a complicated framework in India to govern the innovative contract operation. In the short term, we underestimate and overestimate new technology in the longer term.
Intelligent contracts must be refined before they can be widely adopted for complex business relations. However, their effect will change the incentive and reward structure in future contracting. When considering smart contracts, it's essential not just to consider the application of existing systems and concepts to this technology. The real revolution in smart contracts will be brought about by a paradigm we've never imagined.
