Many companies are interested in blockchain technology. Blockchains are typically public, which sometimes isn’t preferred by companies. Smart contracts offer solutions for this, and many other things. You’ll learn more about that on this page.
Smart contracts are one of the most important concepts within blockchain. It is therefore important to know what they are, what they do and why they are so crucial for blockchain to be a success. In this article we will explain the ‘how, what and why’ of Smart Contracts in understandable language.
In subsequent articles we will go into detail about what forms of smart contracts there are and how you can program a smart contract yourself, among other things. When buying a house, a car or taking out a cell phone subscription, typically physical contracts are used.
It is also possible to draw up a digital smart contract. A smart contract is the elaboration of the Canadian-Russian founder of Ethereum, Vitalik Buterin. The idea of a smart contract was already described once in the late 1990s by Nick Szabo (one of the people suspected to be Satoshi Nakamoto in reality). That was the reason for Buterin to start developing smart contracts.
What problem does a smart contract solve?
Smart contracts could be applied to almost any situation in which the buyer and seller do not 100% trust each other. Because of smart contracts, there is no need to, because these are basically self-executing contracts with the terms & conditions inside of them. All transactions are traceable and immutable. And because it’s done through blockhain technology is distributed and neither party can tamper with the contract.
Examples of where this is interesting:
- Supply chain management (For example in the case of fair trade produce, many people want to know where their food comes from. Through the use of blockchain technology & smart contracts the whole supply chain of their food can be put on the blockchain. From farmer to the grocery store. Allowing them to confirm this is an actual fair trade product).
- Real Estate (Real Estate is a very traditional and slow industry, full of paper work and high entry barriers. Through the use of smart contracts and blockchain technology it’s possible to offer fractionalized (tokenised) real estate, allowing anyone to invest in real estate).
- Health Care (Personal health records can be encrypted and put on the blockchain, accessible only to those who should have access and own the private key to decrypt the contents. This could be used for patient history, receipts, etc.).
- Decentralized Finance (DeFi has become one of the hottest industries this past year. Smart contracts allow anyone to borrow and lend money through the use of collateral. There’s a trustless experience where people from all over the world can borrow or lend money without knowing each other).
What are advantages of using smart contracts?
Smart contracts make it possible to deal flexibly with agreements that are made. For example, the price and conditions for payment can be adjusted automatically (if both parties agree).
If a party doesn’t fully comply with certain conditions, it is possible to automatically pay a lower price – without the intervention of a person! Smart contracts thus make it possible to check contracts automatically and continuously. If the other party has fulfilled certain conditions, it is possible to be paid for this immediately, without having to send an invoice. In this way, smart contracts put an end to mountains of paperwork.!
- Secure and transparent
Smart contracts can be used for many things. Because a smart contract is not assessed by a third party, but by a network of computers. This means that the results cannot be tampered with. The computer network checks whether both parties comply with the conditions and agreements of the smart contract. If the agreements are violated, then the transaction is declared invalid. Thus, smart contracts also put an end to fraud.
Smart contracts are typically used on decentralized networks. By decentralized we mean: no third party is involved. In principle, a smart contract is set up by two or more parties and the agreements are programmed. A smart contract can be used for all sorts of things. For example, as a rental agreement, to record music rights, or to conclude insurance policies in the future. Meanwhile, even the sports world is using smart contracts.
Each participant gets his or her own private key. We call this the private key. A private key is a component with which one can check the series of ledgers to see if everyone has kept to the agreements. If the private key is changed, the contract is no longer valid. So a private key can be seen almost literally as a key that works on a lock of a door. If the key is changed, the door will not open and you will lose access.
Normally, companies employ workers to check and eliminate paperwork. Smart contracts use programming language that can automate these tasks, this makes it possible to save hours of work.
Smart contracts also save costs, as it saves a lot of human administrative work and there are no dependencies on third parties. It is possible to save costs that you would otherwise have incurred – think of notary fees.
When one has to manually fill out papers or perform the tasks mentioned in them it is possible that mistakes can be made.
Smart contracts make it possible to automatically and quickly put an end to human errors.
As you see, using a smart contract has many advantages over traditional contracts and is just one of the reasons why blockchain is here to stay.