Smart contracts are self-executing
contracts containing the terms and conditions of an agreement among peers. The
terms and conditions of the agreement are written into code. The smart contract
executes on the Ethereum Blockchain’s decentralized platform. The agreements
facilitate the exchange of money, shares, property, or any asset.
Now imagine a
scenario, but with smart contracts—applications that replicate and execute all
the provisions of a standard legal agreement and its associated terms and
conditions. When the ship arrives, the cotton is unloaded, and the buyer scans
a barcode on each pallet as it passes inspection. As soon as those scans are
complete, the data they generate is uploaded to a blockchain, triggering a
series of events including filing the customs declarations, paying any
necessary duties, transferring ownership from the seller to the buyer, and
transferring payments from the buyer to the seller and the carrier. If all
conditions of the contract bargained for exchanges are met, the entire process
can take about 10 minutes or less.
The latter
scenario is already a reality. Although the concept of smart contracts has been
around for decades, it’s only thanks to the advent of blockchain—which creates
immutable records of each transaction shared by multiple parties—that every
provision can be automatically executed and verified along the way. Since smart
contracts run in environments in which they are executed exactly as written,
they do not require approval at each step as long as pre-established conditions
are fulfilled.
How does it work?
A smart
contract is an agreement between two people in the form of computer code. They
run on the blockchain, so they are stored on a public database and cannot be
changed. The transactions that happen in a smart contract are processed by the
blockchain, which means they can be sent automatically without a third party.
Smart
contracts are automatically executed once the conditions of the agreement are
met. This means there is no need for a third party, like a bank, a broker, or a
government.
What are Smart Contracts Currently
Being Used For?
The
possibilities are endless for smart contracts. They are already being used for
financial trades and services, insurance, credit authorization, legal
processes, and even crowdfunding agreements (ICOs).
Smart
contracts are an exciting development that would not be effective without the
use of blockchain to ensure that contract terms automatically execute if all
parties meet agreed-upon conditions. They have the potential to revolutionize
multiple industries, freeing up capital and giving legal departments around the
world an opportunity to focus their talents on strategic initiatives and
complex contracts and litigation instead of routine contract enforcement that
may be open to dispute.
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