- Smart contracts are self-executing computer programs stored within a blockchain network.
- They contain the terms of an agreement between parties and automatically enforce the terms when the conditions are met.
- Smart contracts can be used for various applications, including financial transactions, supply chain management, and voting systems.
- The use of blockchain technology in smart contracts provides benefits such as increased security, transparency, and immutability.
- Smart contracts eliminate the need for intermediaries, reducing costs and increasing transaction speed.
Smart contracts, a technology that has gained popularity in recent years, have their origins in the development of Ethereum. Vitalik Buterin first conceived Ethereum in 2013 to address limitations of existing digital currencies and enable the execution of short programs on the blockchain. They released an initial proposal that allowed users and applications to push code into the blockchain through transactions, which marked the first mention of smart contracts.
What are Smart Contracts and Their Purposes on Blockchain?
Smart Contracts, photo by Pexels
Smart contracts are the first and most critical part of Ethereum development. They are digital programs that are stored on a blockchain. Smart contracts are self-executing codes that execute when conditions are met. They permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or even external enforcement mechanisms.
Explaining How Smart Contracts Work
How Smart Contracts Work, photo by Pexels
Looking back at the history of smart contracts, computer scientist Nick Szabo first proposed them in 1994, comparing smart contracts to vending machines. Like vending machines, smart contracts can automate virtually any kind of transaction. Anyone can create and deploy a smart contract on a blockchain. The code is transparent and publicly available, so any interested party can see precisely what logic a smart contract follows when it operates within the blockchain. Smart contracts can follow logic based on various types of input, such as digital assets or other inputs.
Benefits of Smart Contract
Benefits of Smart Contract, photo by Pexels
There are several advantages and benefits of using Smart Contracts, such as:
- Cost Efficiency
Smart Contracts can eliminate intermediaries, reducing operating expenses and the need for personnel to monitor the progress of a complex process, which can reduce costs for businesses.
- Processing Speed
The absence of intermediaries can improve the processing speed of business processes. Since Smart Contracts are executed automatically, the time invested is greatly reduced compared to manual contracts.
Smart Contracts do not require human intervention, offering autonomy and independence to businesses. Thanks to their autonomous nature, the terms of the contract are automatically adjusted and updated.
- Storage and Backup
Smart Contracts record essential details in each transaction, which can be permanently stored for future records. This feature helps businesses easily retrieve backup data whenever user details are included in a contract.
The terms and conditions of Smart Contracts are fully visible and accessible to all parties involved, ensuring transparency throughout the transaction for all parties.
Applications of Smart Contracts
Applications of Smart Contract, photo by Pexels
In reality, Smart Contract use cases and applications can vary from industry based on where companies are using it. Here are some examples of applications of Smart contracts.
- Digital Identity
Smart contracts are commonly used for digital identity management. They can contain various types of data, such as information about individuals, organisations, or electronic devices. Digital Identifier (DID) smart contracts can also be used to prevent crimes like identity theft. They give individual users total control over their data and allow them to share the content of their data as they please, increasing security and reducing the possibility of a data breach.
- Cross-Border Payments
Smart contracts have the potential to revolutionise cross-border payments by improving the liquidity of financial assets and increasing the financial efficiencies of businesses. Proper smart contract integration is necessary to make them work within cross-border payments and solve legal complications.
- Loans and Mortgages
Smart contracts can improve the loans and mortgages process by connecting parties and ensuring that the entire process can be completed seamlessly. They also provide an error-free process. For example, a Smart Contract can be set up to handle a mortgage by tracking payments and releasing the property when the loan has been completely paid off.
Smart contracts can assist governments in managing their operations, including land title records. Land title records require parties to transfer properties efficiently and transparently, which can be facilitated by smart contracts. Furthermore, smart contracts can reduce auditing costs and improve transparency within the government ecosystem.
- Hospitality Industries
These days, hotels rely on Online Travel Agents (OTAs) to show their inventory updates. The OTA network boasts a dominant position in the industry, monopolising it and making it nearly impossible for new and small players to enter the market. However, implementing smart contracts will open up new opportunities for new and smaller players, thereby globalising local hotel properties.
- Trading Activities
Another smart contracts use case is that it can be used for trading activities because smart contracts are self-executing and automatically enforce the terms of the agreement between parties. They can be used to automate a wide range of activities, including trading activities.
The benefits of using smart contracts for trading activities include the following:
- Smart contract use cases include trading activities. Smart contracts can automate the buying and selling of assets, eliminating the need for intermediaries and reducing the potential for errors.
- They are stored on a blockchain, which is a decentralised and transparent ledger. This lets all parties see the contract terms and the trade status in real-time.
- Smart contracts are secured by the blockchain, making them resistant to fraud and tampering. This helps protect the interests of all parties involved in the trade.
- They can reduce the costs associated with trading by eliminating the need for intermediaries such as lawyers and banks.
- Smart contracts can execute trades almost instantly and are not dependent on third-party intermediaries that can slow down the process.
- The smart contract also enables the creation of decentralised exchanges (DEXs) that allow trades to happen in a peer-to-peer fashion with no central point of control.
In summary, smart contracts provide a tamper-proof, transparent, and automated method for conducting trading activities, which can reduce costs, increase security, and speed up the process.