How Do Smart Contracts Work?
There are many elements to blockchain technology. And with ever-increasing applications and innovations being developed within the space, it’s important to demystify some of the fundamental pieces of the puzzle and clarify some of the jargon.
Smart contracts are one of the key concepts made possible by blockchain.
What Is A Smart Contract?
The idea for smart contacts was first conceived in 1993 by Nick Szabo, a legal scholar, and cryptographer, he defined the concept as:
“A set of promises, specified in digital form, including protocols within which the parties perform on the other promises.”
Simply put, a smart contact is a self-executing contract that is made possible by public blockchains and enforced by cryptographic coding.
The aim of a smart contract is to improve the observability, verifiability, privity and enforceability of a contract.
What Can Smart Contracts Do?
The scope for smart contracts is huge.
Basically, it can function as a replacement for any agreement that needs a clear, traceable account — think bank loans, supply chains, property sales or even crowdfunding.
Szabo likened a smart contract to a vending machine.
With a traditional contract you would need to seek an intermediary. Pay them. Then wait for the returned document. With a smart contract it’s a simple case of dropping your cryptocurrency into the vending machine and the exchanged goods will be immediately released.
Smart contacts are definitely smart.
Whether they are used to facilitate the sale of house — holding the deeds of the property and the currency until both ends of the contact have been verified — or to crowdfund a project — holding all the finance until the goal has been met — they are always accurate and always traceable.
Smart By Name, Smart By Nature
Security and transparency are the highest concern for people when making an online transaction. Smart contracts utilise the blockchain, so they gain all its security benefits (these are outlined in MEDIA Protocol And Blockchain Security — Part 1).
Safe. Secure. Transparent.
Smart contracts are stored on the blockchain, so all data is immutable. It cannot be tampered with or unknowingly altered. There’s no way to change a contract without a traceable digital footprint.
The blockchain is safe from hacking attempts. There is no one flawed point for access. The data is stored anonymously on a peer-to-peer (P2P) network.
The network also increases autonomy, managing the execution and removing the need for an intermediary. This is highly cost- and time-efficient. The contract is programmed to execute when it is satisfied, with no reliance on manpower or paperwork.
So, no more missing paperwork either.
What Does The Future Hold?
In 2017, the first house was sold via the blockchain. Smart contracts are becoming increasingly more common within the insurance field. Businesses are adapting and evolving.
There’s no denying that successful businesses are open to innovation. Smart contracts are opening up new ways to do business. With Gartner’s prediction that by 2022, 25% of global businesses will be using smart contracts, it’s time to explore what they can do.
Smart contracts can open up public registers that have previously been limited to officials. Private transactions can move forward without reliance on an intermediary. Disruptive fintech firms will be able to interact with systemic financial infrastructure.
All of this means a shake-up. Allowing new entrants will reinvigorate stagnant business sectors, while retaining secure and transparent business practices.
Even buying and selling goods online could switch to the use of smart contracts, with buyers and sellers entering into escrow agreements. The contract would freeze the cryptocurrency, in effect making a payment that the seller can’t spend until the buyer confirms receipt of the goods.
In an age where speed, transparency and security are everything, smart contracts are standing out.
The future is definitely smart.
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