Back to Basics: What are Smart Contracts

Make An Agreement Without Having to Trust Anyone

Looking far back in time, down to the prehistoric days, signing any form of contract or agreement has always existed. Now, fast-forward to our current times, there has been an increase in demand for contracts to be signed since the era of industrialization and Internet technology.

We have agreements and contracts in our day-to-day activities. It could be in the form of a pact, treaty, bond, loan, deal, legal binding, tenancy, etc.

But the thing about these agreements is that they are heavily reliant on the trust of the other party to come through else, the agreements break. A breach of contract has happened many times and will keep happening because not everyone can fully be trusted.

Now the internet has blessed us with an improved version and this time we don’t need to trust other parties to fulfill their end of the bargain. It is being handled by a programmable code. These codes are what we call smart contracts. Let’s dive in further.

What are Smart Contracts?

A smart contract is a computer program or transaction protocol designed to automatically carry out, manage, or record legally significant events and activities in accordance with the conditions of a contract or agreement.

The goals of smart contracts include lowering the demand for trustworthy intermediaries, the expense of the arbitration, the risk of fraud, and the number of deliberate and unintentional exceptions.

There are different architectures for how the programs underpinning smart contracts are developed, managed, and updated. They can be stored as part of a blockchain or other distributed ledger technology.

Most people identify smart contracts with cryptocurrencies, and Ethereum’s smart contracts are widely regarded as a key building block for decentralized finance (DeFi) and NFT applications.

Quick Look into Its History

Cryptographer Nick Szabo proposed the idea in 1994 of being able to store contracts as computer code.

Upon the fulfillment of specific requirements, this contract would automatically become active. This approach may eliminate the requirement for reliable third-party businesses.

How Does Smart Contract Work

Imagine Tom wants to purchase Mariam’s home. Using a smart contract, this agreement is created on the Ethereum blockchain. Tom and Mariam have an agreement in this smart contract.

The agreement will read something like this in its most basic form: “WHEN Tom pays Mariam 300 ETH, THEN Tom will get ownership of the house.”

Tom can feel secure in paying Mariam 300 ETH for the house since once this smart contract agreement is established, it cannot be modified.

In this case, Mariam and Tom would have to pay a lot of fees to other businesses if a smart contract hadn’t been used. Including the bank, an attorney, and a real estate agent.

It’s wonderful, right? No more waiting for a lawyer and broker to process the deal, and no more commissions! This is only one of many applications for smart contracts.

Once the terms of the agreement are satisfied, smart contracts automatically carry out their provisions.

Let’s check one more example just to drive it home. Think of a machine that offers Coke cans for sale for 25 cents. If you put a dollar in the machine and choose a soda, the system is hardwired to either provide the soda and 75 cents in change or (if the soda of your choice is sold out) to encourage you to choose another soda or get your $1 back. This is an example of a simple smart contract.

To build a smart contract, you have to follow these steps:

• Agreement
• Conditions
• Coding
• Blockchain
• Execute
• Recording

There are a few steps that make up the concept of a smart contract. A smart contract first requires an agreement between two or more parties. Once built, the parties can decide under what conditions the smart contract will be deemed successful. The choice would be encoded and stored in the blockchain network’s smart contract, which would then be written with the decision.

The transaction is recorded on the blockchain as usual once the contract is finished. The new “state” of the network will then be updated as a result of this transaction by all nodes updating their copies of the blockchain.

Areas Where Smart Contracts Can be Used

Here is a non-exhaustive list of a few industries or sectors where smart contracts are being adopted.

Real Estate

With a smart contract in place of a broker, the house-transfer procedure can be streamlined while being just as secure as when using an intermediary. Herein lies the significance of the term “trustless.”

Imagine that the Ethereum blockchain contains a tokenized copy of your house’s deed. A smart contract would be made between you and the buyer if you were ready to sell it.

Until the buyer’s monies are correctly submitted, the deed would be held in escrow under this agreement. It won’t be revealed before that point. The buyer receives the house much sooner than they otherwise would have, saving the seller money because they don’t have to pay a middleman.

Digital Identity

You have control over your data and identity thanks to smart contracts. Your identity will always be stored on a decentralized blockchain, safe and secure from any malicious actors. Additionally, it is possible to tokenize it and profit from it.

Health System

Smart contracts can be used to transfer patient documents securely, allowing no access from third parties. This way, the patients are in full control of their own data. Even if researchers want to use patient data, they get to pay for it.

Government

Voting is made more secure against fraud thanks to smart contracts and blockchain technology. The vote transaction is written to the blockchain and is irreversible once there. A token will be transferred to an address that reflects the winner of the vote by the smart contract after the voting is complete.

Concluding Thoughts

Many banks and insurance companies are already using smart contracts in their everyday business operations. As a result, smart contracts are already in use and being tested in actual situations. It won’t be long before they become a regular part of our daily activities.

Despite what was just said, there is still a long way to go until everything is if ever, governed by a smart contract.

About IncubateX

IncubateX is the 1st women-led incubator & NFT launchpad on web3. We are here to promote big ideas and revolutionary projects in clean energy, tech, social reinvention, sustainable manufacturing, and more.

We specialize in helping innovative projects incorporate web3 infrastructure -mainly NFTs- within their ecosystems while focusing solely on mission-driven projects that positively impact IRL.

IncubateX Official Links

Official Linktree | Discord | Whitelist