Smart contracts are one of the most important byproducts of Blockchain technology when it comes to the impact they could have on our daily life.
A smart
contract is basically a computer code on top of a blockchain that comes with a
set of rules that bind the parties to interact with each other in a certain
way. In case those pre-defined rules are met, the agreement is automatically
enforced without the need for a middleman.
How do smart contracts work?
The parties
involved in a transaction decide to use an options contract. It includes the
preset price and pre-defined rules that have to be met in order to complete the
transaction and change the ownership of the goods.
When a
triggering event is hit, the contract is exercised according to the coded
terms.
Regulators
use blockchain to monitor market activity and maintain the privacy of
individual actor’s positions.
Smart
contracts’ functioning is often compared with that of a vending machine that
has a pre-programmed set of rules for transactions. The person selects a
product and inserts the coins. The machine then checks whether you inserted a
correct amount and, that being the case, ejects the product and changes if
necessary. Smart contracts operate similarly: you just drop a required amount
of a cryptocurrency into the smart contract, and the goods you agreed upon drop
into your account.
All the
rules of the transaction and the penalties of not following them are by default
pre-defined and enforced by smart contracts. Smart contracts could be used to
exchange money, property, shares, or anything of value in general.
Where can we use smart contracts?
A smart
contract can formalize the relationships between people, institutions, and the
assets they own. Smart contract use cases range from simple to more complex. We
can find examples of use cases in e-government, banking, insurance, energy,
telecommunication, but also in the music & film industry, the art world,
mobility, education, etc.
As
blockchains are considered faster, cheaper, and more secure than traditional
systems, more and more banks and governments, who need the highest level of
security, are turning to them. For example, for governments, smart contracts
could provide an infinitely more secure system to vote online, that way hiking
low voter turnouts, while banks use smart contracts to log change of ownership
and transfer payments.
The fact is blockchain
and smart contracts have the potential to disrupt many industries.
We might say
that the most interesting part of smart contracts is their capacity to really
alter aspects of society in general. Smart contracts have the makings to provide
a technical basis for all sorts of social changes.
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