Used for improving and implementation of many economic exchanges, Blockchain technology has been having many applications in the world of finance. Some of these implementations are smart contracts. These are digital contracts that use the benefits of blockchain technology to bypass intermediaries like banks.
The term “smart contract” was first coined in 1994. It was called “smart” by a computer scientist named Nick Szabo. However, this name created a discrepancy between what it actually is. It might be confusing for some because smart contracts are actually computer codes which are registered on a blockchain, and they cannot be erased or edited. By following a set of appointed requirements pre-determined by a an agreement between two or more parties, these computer programs are able to manage digital assets.
With the emergence of Ethereum – a platform which is specialized in hosting such contracts, more entrepreneurs have started showing interest in smart contracts.
A traditional contract is a binding legal agreement which has previously determined terms in accordance with the local laws of the parties’ whereas in smart contracts there are no legal enforcers and there is no predetermined terms. So, the agreement becomes judicially enforceable upon ratification.
Benefits of Smart Contrats
The terms of the transaction are written in a code existing in the blockchain and signed cryptographically by the involved parties. The contract remains to be implemented when the conditions are met.
A cryptographic or digital signature means all parties sign with their private keys.
The whole transaction is in the blockchain’s code. This means that it cannot be lost or altered.
As it is an automated process, there is no need for a legal enforcer to validate the transaction. So, it is possible for complete strangers to be able to carry out transactions.
Information is transparent. This means that all parties have access to the same information at the same time.
It eliminates the need for paperwork. Also, there is no risk of fraud. It saves time and Money, and brings more comfort to those involved.
There are also standardized smart contracts. They are different as they are designed for specific transactions. These can be customized to suit the needs of the parties.
The unchangeable nature of the blockchain’s code can also be a drawback. As the code is written by people, there is always room for human error. After the code is implemented, it cannot be changed. If we have to give an example, human error has left substantial financial damages in the infamous DAO hacking in which $60 million have been stolen.
Investigations are being made to create “escape windows”. These would enable the code writers to pre-program methods that could change the terms of the agreement. However, implementation of such windows comes with a certain degree of inconvenience because it is complicated technically and would render the smart contracts less effective.
Regulation of smart contracts by governments would render problems. This is a set back for people who would like to make such transactions.
As the blockchain is transparent, competitive companies can have access to all stipulated conditions.
If there is no programming, then there are no smart contracts. As you need to program for a smart contract, you may need to get a costly help of a programmer who is efficient in the structure of blockchain technology.
Applications and uses of Smart Contracts
As the required payments are done via cryptocurrencies, smart contracts are dependent on them. This reduces the time spent on transaction processes by more than half and due to this reason, smart contracts posing a real threat to the banking industry.
When there is a voting, results cannot be modified once they are stored on the blockchain. Then, they would be distributed among the nodes of the network. All data is anonymous. This eliminates any chance of manipulating the outcome of the election.
If everyone keep their end of the contract, a supply chain works uninterrupted by getting information.
Smart contracts are also a means of buying or renting real estates. When a smart contract is used in such cases, the previously established instructions are executed by the contract.
But how do smart contracts know about the payment time?
This is where oracles work. Oracles are computer tools by which smart contracts are updated by external information.
Scheduled orders are put in motion by oracles after a real life situation occurs, which is related to the smart contract. These external information can vary in type. For example, they can be a value of a specified currency or an execution method of a payment or a price or temperature variation.
These softwares are still going through a developing processes. There are systems currently being created which collect data from various suppliers. Then, they conclude which has the most reliable data. By verifying data itself, oracles eliminate the need for a centralized authority as a third party which verifies data.
The potential uses of smart contracts are practically limitless. They have a wide range of applications. This potential saves time and Money. As there is no legal regulation for the use of this technology, the development is also slower. However, smart contracts will improve, and so will the code developers.
Also, we should warn you that, if you are not a programmer and interested in such contracts, you should be very careful with whom you are working with for the programming.
Regardless of the disadvantages, it seems that the Ethereum blockchains will be used to create smart contracts and apps to meet the varying needs of the people.