The truth about Smart Contract

A smart contract is a self-executing contract with the terms of an agreement between buyer and seller being directly written into lines of code. The code and agreement contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible.

Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.

While blockchain technology has come to be thought of primarily as the foundation for bitcoin, it has evolved far beyond underpinning the virtual currency.

The smart contract helps to solve the issue of mistrust between parties and business partners. It has several benefits for wide range industries; reducing unnecessary costs and time expenditure while enhancing transparency.

The smart contracts are stored on a blockchain. It is extremely difficult for the system to be corrupted as it would require enormous computing power to override the whole network which is not possible for everyone to achieve!

The smart contract is a protocol intended to digitally facilitate, verify, or enforce the negotiation of a contract. It also facilitates a credible transaction without the involvement of the third party. After being first proposed by Nick Szabo who coined the term in 1994, smart contracts have recently caught the attention of various ERC standards coming forth, and numerous platforms facilitating a decentralized approach to run code.

Some of the key properties of a smartcontract are:

1. Autonomy
2. Decentralization
3. Auto sufficiency

Smart Contracts Only Work with Digital Bearer Instruments

Even without Turing-completeness, smart contracts sound really good. After all, who likes having to go to court to get something that rightfully belongs to them? Isn’t using a smart contract much easier than normal contracts?

Wouldn’t real estate benefit from smart contracts? For example, Alice can prove she owns the house. Bob can send money for the house and get the house in exchange. No questions of ownership, trustless, fast execution by the machine, no need for judges, bureaucrats, or title insurance. Sounds amazing, right?

There are two problems here. The first is that smart contract execution by a centralized party is not really trustless. You still have to trust the centralized party to execute. Trustlessness is the key feature, so centralized execution doesn’t make sense. To make smart contracts trustless, you need a platform that’s decentralized.

That leads us to the second problem. In a decentralized context, smart contracts only work if there’s some definitive link between the digital version and the physical version. That is, whenever the digital version of the house changes ownership the physical version has to also change ownership. There’s a need for the digital world to “know” about the physical world. This is known as the “Oracle problem”.

When Alice transfers the house to Bob, the smart contract needs to know that she actually transferred the house to Bob. There are several ways of doing this but they all have the same essential problem. There has to be some trust in some third party to verify the events in the physical world.

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