Smart Contracts are simply contracts turned into codes and
able to have feedback such as the release of consideration (money) to one party
to the contract, when the condition of the required amount is met and then the
release of the product or service to the other party, when the condition of
payment is met. The primary aim of smart contracts has been said to be the
reduction of human errors.
How are
Smart Contracts Created?
Smart Contracts are created using codes. The bitcoin
blockchain uses C++ while Ethereum uses Solidity. A sample smart contract built
on the Ethereum blockchain can be found on their site. Ethernet smart contracts
are run on the Ethereum Virtual Machine. It’s possible for one to create their
own tokens using the Ethereum blockchain. Once created, a smart contract cannot
be altered. To create smart contracts, a background in programming is
essential, especially java and solidity programming languages.
Benefits of using smart contracts
- Accuracy:
The last time you bought a house or a car, can you
remember the number of paperwork that had to be filled out? The more the paperwork,
the higher the possibility of errors. But with smart contracts, you can be sure
of accuracy.
- Affordable:
Since you won’t be using all those intermediaries, remember you even have to pay for their services, you would be able to save on money that could’ve gone into paying for a lawyer, a government official, or a notary.
- Backup
A few months ago, while working on a project with
some friends, we’d almost completed the project when one day, my friend sent me
a frantic message saying he had mistakenly deleted the document we were working
on – you can imagine how loud I shouted “What?!!!” What saved the day was that
we used Google docs for our collaboration, which means even though my friend had
lost the document, I still had it and was able to bring him on board again.
If you’ve used Google docs before, you would easily
understand this concept about how smart contracts provide backup in the event
of, say, losing the ‘contract.’ Google Drive
is similar to a blockchain in this respect, where anyone with access to a
folder on it will also have a duplicate of all files in the folder. So it
doesn’t matter if one of those with access loses his files, the others have got
his back.
- Free Will
With a smart contract, you can determine the
terms of the contract yourself because you have control and won’t need the
input of a third party like a lawyer, broker or any other intermediary who
could probably be biased when making the agreements for you. Let’s recall our
ATM story. Every month, your bank automatically deducts ATM services dues from
your account. They actually have more control over your bank account balance
than you do, as you’ll likely have to argue with them if more than required was
deducted. On a blockchain, no single entity is in control. And as mentioned
earlier, smart contracts are stored on a blockchain, thus manipulation by
either of the parties or a third party is eliminated
- Safety
The immutability of blockchain technology means your
smart contracts will be kept safe. While a blockchain is not 100% hack-proof,
encrypting information on it using cryptography makes it near impossible to
hack. Any smart hacker intending to attempt hacking a blockchain would need
hundreds if not thousands of years and be ready to spend lots of money.
- Speed
One of the most cited benefits of technology is that
it gets things done faster than if done manually by humans. Imagine the
difference between the time it takes to go back and forth with documents
between you, a government official, banks, broker, and so on just to get a loan
for your house. On the other hand, a smart contract would take just a few hours
or less to create and execute, while also automating the whole process
involved.
- Trust
Because a blockchain is a distributed ledger, it will
be impossible for one party to try evading her obligations on the contract with
the excuse of losing it. As a result, parties can trust, if not themselves, at
least the blockchain since it self-executes. Centralized ledgers like that of
your bank or government registry could be lost, say, through fire. I hope such
doesn’t happen though, as that would be utter chaos. Unimaginable.
Some common ways of using smart contracts are:
- Multisignature accounts: Funds can only be spent when a required percentage of people agree.
- Encoding financial agreements: Manage agreements between users. Say, if one person buys insurance from an insurance company, the rules of when the insurance can be redeemed can be programmed into a smart contract.
- Agreements based on the outside world: Pull in data from the outside world (financial, political, or whatever) with the help of oracles.
- Provide the third party: Similar to how a software library works, smart contracts can work with other smart contracts in a chain.
- Storage: Store information about an application, such as domain registration information or membership records. Storage in a blockchain like Ethereum is unique in that the data is immutable and can't be erased.
While Bitcoin and Blockchain introduced a disruptive technology for building applications on top of a decentralized ledger of immutable transactions, Ethereum moved even beyond with the introduction of Smart Contracts. It's evident that the technology still needs to evolve before it is widely adopted for production use, but it still represents a bright and promising feature for the application development space.
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