Smart Contracts are the Business Process Enablers for Blockchain. Smart contracts are simply executable codes that run on top of the blockchain to facilitate, execute, and enforce an agreement between untrustworthy parties without the involvement of a trusted third-party. Smart contracts can be divided into two broad categories: Smart Legal Contracts and Code-Based.
Smart Legal Contracts combine a legal template with a business logic and aim to digitize legal contracts.
The Code-Based Smart Contracts can be further divided into three sub-types: DAO (Decentralized Autonomous Organizations), DApps (Distributed Applications) and IoT-combined are for managing business processes within or between organizations.
Smart contracts gave network automation and the ability to convert paper contracts into digital contracts. Compared to traditional contracts, smart contracts enabled users to codify their agreements and trust relations by providing automated transactions without the supervision of a central authority.
In order to prevent contract tampering, smart contracts are copied to each node of the blockchain network. By enabling the execution of the operations by computers and services provided by blockchain platforms, human error could be reduced to avoid disputes regarding such contracts. Blockchain can help companies become better at what they already do by reducing their costs and reducing friction sources that can degrade the customer relationship.
How do smart contracts work?
A smart contract is self-executable so the basic principles of a smart contract are as follows.
- Offer: The transaction is initiated by the first part. The first party writes a contract with an if-then statement using Solidity. Then the agreement is passed to the blockchain.
- Negotiation: After the contract appears on the blockchain, the contract is open for all the related parties to see. The parties can negotiate on the contract terms. Make sure that you verify all the terms in this step because once it is signed, then there is no going back.
- Approval: Once all the parties have approved the contract terms, then triggering events are put into place. Triggering events can be expiry date, due date, strike pass/ stop-loss, or other conditions the parties see fit. After that, the contract is approved, and it becomes immutable.
- Self Satisfying conditions: After approval. It can self verify the conditions inside the contract using real-time data from Oracles or IoT devices like sensors or cameras.
- Triggering event: The smart contract is triggered when the conditions are met, Then the assets are transferred, or the underlying outcome occurs.
Benefits of Smart Contracts
- Accurate – The smart contract depends on real-time data from Oracles. That means they have a 100% strike through triggering rate once they meet all the conditions. Here, you do now have to worry about technical errors that are involved with manual work.
- Save Money and Time – Smart contracts are self-executing. That means you do not have to depend on your lawyer or bank to set up appointments and handle the transactions. The contract can do all of this by itself. Thus, you end up saving lots of money and time required to fulfill manual work.
- Trust and Transparency – Since smart contracts are written on the blockchain, that means no one can change them after the contract has been written. Moreover, every node on the blockchain can verify the contract. If someone tries to pass on a fraudulent transaction, then it would be immediately rejected by the other nodes and it will either revert to its initial state or be penalized.
- Security – The smart contract we write on a blockchain is a distributed ledger. That means every set of entries is connected with previous and subsequent entries. To change a particular entry, hackers need to change all the data in that specific blockchain. This is next to impossible as hackers will need over 51% of all the computers running that blockchain.
- Backup – All the contracts uploaded on a blockchain are present in every computer on the network. So, even if you lose the contract, you can gain access to it from a computer that has access to the blockchain. This makes sure that there is no loss of data. You can even use other contracts available on the blockchain as a template or inspiration to create your contract.
Conclusion
Simply put, Smart Contracts manage transactions in a pre-programmed, automated way. Despite the bright side of smart contracts, several concerns continue to undermine their adoption, such as security threats, vulnerabilities, and legal issues.
