Understanding Smart Contracts
What are Smart Contracts?
A smart contract is a program that triggers an action based on the occurrence of another event. The “if this, then that” method of operation is based on this logic.
Smart contracts are simply blockchain-based computer programs that get activated when certain conditions are met. In general, they are set up to automate the execution of an agreement, ensuring that all parties involved are protected and don’t waste time or energy in the process.
It could be argued that Nick Szabo, who coined the term in the early 1990s, envisioned smart contracts before blockchain technology was developed. He described them as “a set of digitally specified promises and the protocols within which the parties fulfill these promises.”
The Nature of Smart Contracts
1. Smart contracts cannot be changed
They cannot change and cannot be altered. They are programmed to perform a specific action when activated (“if this, then that”). Smart contracts are encoded in the blockchain, and like the blockchain, they cannot be modified, even if your code contains bugs or inefficiencies.
However, they may be “superseded” by a new contract, and whoever does so must inform users of the upgrade.
2. Smart contracts are transparent
No discrepancies exist with a smart contract. A smart contract is an online agreement that can be automatically executed if certain conditions are met.
They are intended to eliminate human errors and difficulties. Because the code is dispersed across a global network of computers, everyone can view the terms of the agreement.
Developers employ cryptography to prevent record modifications. Everyone can see the smart contract and how it is used.
Smart contracts do not require a third party for verification. The blockchain automates this process.
3. Smart contracts are autonomous
Smart contracts function automatically, requiring no human intervention. Since they are written in code, smart contracts are independent of third-party influence.
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How Do Smart Contracts Work
Both a paper contract and a smart contract are agreements in which two or more parties agree to comply with a set of conditions, and their fundamental elements are identical; the voluntary consent of all parties, the object of the contract (good or service), and a just cause that is true and lawful.
However, their writing style, legal implications, and compliance procedures differ.
Paper contracts are composed in standard English. Thus, writing the conditions and terms in the relevant language suffices. If all parties agree, they sign to secure their commitment, which brings us to a paper contract’s legal implication: it incurs expenses.
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In contrast, smart contracts are computer programs. They are written in code rather than natural language. They are a type of software that, like other software, is programmed to perform a particular task or series of tasks based on previously entered instructions.
Therefore, its fulfillment is not subject to any party’s interpretation: if event A occurs, consequence B will immediately take effect. Like all Bitcoin-related technologies, its legal implications have fallen into legal limbo. This function is assumed by the computer code, which will unquestionably ensure compliance with the terms. Consequently, significant time and cost savings are realized.
Advantages of smart contracts
1. Smart contracts can make business more efficient
Contracts based on blockchain technology have made business and other operations more reliable, efficient, and profitable. A vast array of industries could benefit from using blockchain-based smart contracts.
Using smart contracts to automate the payment sequence can, among other things, reduce overbilling and prevent fraud.
2. Smart contracts can help reduce data breach
As smart contracts confirm the agreements without brokers or mediators, the risk of data breach by a third party is diminished.
3. Smart contracts lead to enhanced precision and effectiveness in businesses.
After the condition is met, the process is immediately executed. Due to these smart contracts’ digital and automated nature, there is no paperwork to delay the processing time. The possibility of making mistakes when manually filing documents is also eliminated.
4. Smart contracts can help with digital storage
Documents in the blockchain are duplicated multiple times, ensuring a secure digital backup and facilitating contract retrieval in the event of a data loss.
Who uses smart contracts?
Smart contracts are a relatively new technology, but crypto projects have implemented them extensively.
Smart contracts are at the center of the decentralized finance (DeFi) revolution and are used to power popular DeFi protocols such as Compound, Aave, Uniswap, and countless others.
1. Healthcare Industry
There have been data breaches involving patient identity and other confidential information in the healthcare industry. To mitigate this privacy breach, the blockchain can be used to encrypt patients’ health data. The patient’s data will be accessed using a private key owned by the patient.
2. Financial Services
The implementation of smart contracts can transform traditional financial services in several ways. Smart contracts can incorporate essential accounting tools, thereby eliminating the possibility of account record breaches.
Traditional systems are inefficient due to the need to pass paperwork through multiple approval channels.
In addition, these processes are more susceptible to data loss and forgery risks. Smart contracts can help eliminate such risks by providing participants with secure digital version access.
Conclusion
“Smart contracts” are computer programs backed by blockchain and then executed when certain conditions are met.
Both traditional paper contracts and their digital counterparts, “smart contracts,” are agreements in which two or more parties agree to comply with a set of conditions. These agreements require all parties’ free and informed consent, a specific agreed-upon good or service, and a true and lawful just cause.
They streamline the execution of a contract in a way that protects all parties and conserves time and effort.
Smart contracts have made businesses and other operations more trustworthy, efficient, and profitable.
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