Contracts are a concept that humanity is well-versed in. A contract is an agreement with a collection of terms that can be made orally or in writing. In today's world, the enforcement of contract terms is guaranteed by a third party - the government. Furthermore, a lawyer is required to draft the contract's document. Otherwise, there might be inconsistencies and inaccuracies in the agreement's terms. And if one of the parties breaks the contract's terms, you'll have to go to court, which can take a long time and cost a lot of money. However, thanks to smart contracts, this situation could change in the near future.
What are smart contracts, and how do they work? What advantages and disadvantages do they have over traditional contracts?
Smart contracts
A smart contract is a computer program that tracks and enforces contractual obligations' fulfillment. The parties define the terms of the agreement, as well as the consequences for breaking them, and sign it digitally. The smart contract defines if the terms have been met independently and then decides whether to complete the transaction and move the necessary assets (money, shares, real estate property titles), enforce a fine on participants, or restrict access to assets.
History
Smart contracts were first identified in the early 1990s by American cryptographer and computer scientist Nick Szabo, long before blockchain technology was invented. Smart contracts, according to Szabo's definition, are digital protocols for transmitting information that use mathematical algorithms to automatically execute a transaction after certain conditions are met and to completely monitor the operation. This term, however, could not be applied in the 1990s. The required technologies, such as blockchain, did not exist at the time.
Bitcoin, the first cryptocurrency based on blockchain technology, debuted in 2008. The Bitcoin blockchain's capacity to build smart contracts, on the other hand, is severely restricted. The Ethereum network, which debuted in 2013, was the catalyst for smart contract growth. Although there are several platforms that allow smart contracts on the market today, Ethereum remains one of the most common.
How Smart contracts works?
Unlike conventional contracts, a smart contract independently tracks and makes decisions based on the fulfillment of the requirements stated in it. Smart contracts operate in a decentralized network that stores them and ensures they execute correctly. Since they're written in a programming language, only an IT expert can understand them.
Parties use electronic signatures presented as encryption keys to sign smart contracts. The smart contract completes the deal by sharing assets between the parties if all of the agreement's terms are met. The smart contract imposes fines or restricts access to assets if the requirements are not met. To do so, a smart contract must have control over the assets listed in it, as you would expect.
It's important to remember that the smart contract code is stored on the blockchain and has no external connections. However, in order for a smart contract to make decisions, it must communicate with the outside world to obtain the required data. That's why there are 'oracles,' or frameworks that detect and validate real-world events before transferring data to the blockchain for use by a smart contract.
The benefits and drawbacks of smart contracts
Benefits
Transparency is essential. Each party to the agreement has access to the blockchain to monitor the progress of events.
Without the permission of the other participants, no one can add, modify, or remove entries.
The automated transaction execution system eliminates the human element and guarantees high contract execution accuracy.
Smart contracts are executed without the involvement of any third parties.
By cutting intermediary costs and lowering operational costs, significant savings can be realized.
Reduced time spent on paper processing
Drawbacks
Without the assistance of an IT expert, it is extremely difficult for a layperson to comprehend and build a smart contract.
Because of the contract's immutability, it lacks versatility. Since all parameters are explicitly pre-programmed, a mistake made when entering data cannot be reversed.
Smart contracts' legal status is also up in the air. Despite the fact that policymakers in many countries are already working on this issue, government approval of smart contracts is still the exception rather than the rule.
The openness of smart contracts has a disadvantage in that it allows all of the contract's flaws and weaknesses available to everyone.
Smart contracts are vulnerable to coercion due to their reliance on oracles.
Smart contracts use case
Smart contracts can be used everywhere, but it is both costly and ineffective. The most logical application for them is for standardised, routine transactions that are easy to monitor.
Supply chain management is probably one of the most exciting applications for blockchain and smart contracts. Modern logistics is a highly complicated process involving massive amounts of paperwork and, as a result, high transaction costs. Many of the challenges that modern logistics face can be solved by using smart contracts.
In the insurance industry, smart contracts can help to enhance document flow in insurance business processes, as well as the processing of insurance claims and payout awards in traditional insurance cases.
Banking services are available. Smart contracts can save money in the banking industry by automating the process of negotiating and implementing loan agreements.
The Internet of Things (IoT) is a term that refer Blockchains' stability and immutability, combined with the capabilities of smart contracts, make them very promising for the Internet of Things. Smart contracts will create transparent frameworks for interaction and value exchange between smart devices.
Copyrighted material must be protected. Smart contracts may be used by copyright holders and content owners to charge for the use of their intellectual property in a straightforward manner.
Smart contracts may be used in a variety of settings, including government, real estate, healthcare, and work contracts.
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