Smart contracts — a new technological revolution
Smart contracts are contracts based on blockchain technology. There is no need in anybody’s control and participation for their execution.
The essence of the blockchain
Before talking about smart contracts, we need to understand the concept of blockchain. This is a decentralized (distributed over a network of computers) database, perfectly protected from hacking. Information is not stored on a shared server, and the processing speed is very high.
Putting it simply, the blockchain is analogous to the continuously logging digital journal, in which all previous completed transactions are recorded in the given order. They form blocks with a timestamp and a reference to the previous block. On the example of e-currency, the blockchain is tracking during each transfer how much money is in each user’s wallet, thereby controlling the creation of new coins and preventing inflation.
The essence of the process gave the name to technology. “Block” represents each new “record”, and “chain”- their totality, the list of operations.
The use of encryption guarantees a high degree of security. No one can make changes to the old blocks — only the update function is available, which is carried out at each transaction. The user has the ability to change only those “records” to which he/she has access through special private keys.
The technology provides synchronization of blockchain copies for all participants of the process.
In comparison with usual systems, the blockchain is faster, more convenient, safer, and reliable, and digital self-executing smart contracts were developed on its basis.
How do smart contracts work?
Smart contracts that use decentralized blockchain technology, do not involve third parties serving as guarantors of the transaction. With the help of smart contracts parties make any financial transactions — the exchange of property, shares or financial means — without intermediaries, who would require payment for their services. You can forget about paperwork and eliminate the risk of making mistakes when manually filling in multiple forms.
Digital smart contracts work on the principle of vending machines: you “throw” a “coin” (electronic currency or asset) into an “automatic machine” (special program), and you immediately receive the requested product.
The system contains data on the obligations of the parties and penalties in the event of violation. The information is stored in an encrypted form and duplicated in a decentralized registry over and over again, which is a guarantee of reliability and does not give the opportunity to make changes.
The program tracks the full implementation of the agreed conditions and automatically decides whether the asset will pass to its future owner or will return to the original owner (if one of the conditions has not been met).
Types of smart contracts
Smart contracts are divided into two types: conditioned and unconditioned, depending on the conditions for their implementation.
Conditioned smart contract
It reads data from the chain of blocks. This can be a specific transaction, block height, implementation of another contract, etc. Payment transactions with multi-signature and provably fair lotteries are referred to the conditioned smart contracts.
Unconditioned smart contract
This type of smart contract uses information located outside the blockchain. There are a lot of options: horse racing results (sports betting in general), election results, weather forecasts — anything. To complete such contracts, a trusted oracle is required — an intermediate link between the blockchain and the real world. Oracle is the provider of verified information that triggers an unconditioned smart contract.
Not only one particular person can act as an oracle, but also a team of tokens holders, among whom a vote is taken on the outcome of the event. This decentralized system is used in the Augur prediction market, developed by Ethereum, and on the FirstBlood platform, which allows gamers to earn rewards for winning games.
How can smart contracts change life?
Smart contracts have a great future. The preparation of their templates can be done by professional lawyers.
Logistics and Supply
The supply system is greatly simplified when multiple forms approval is not required in a number of authorities. As a result, firms do not suffer losses and are protected from possible fraud.
Smart contract will allow each player in the market participating in the deliveries to check the fact of the task performance and track the receipt of payments. Thus, when confirming the payment for the delivery of goods in the courier service, the producer of the goods can instantly start producing a new unit.
Smart contracts can reduce to zero the likelihood of interference in the voting process. Voices of voters are added to the decentralised list, which can not be decoded — there is no technique with such computational capabilities.
This system can be used to create self-driven or self-parking vehicles. Smart contracts are also able to find out if the sensor or the driver was the cause of the accident. Thanks to them, insurance companies will easily determine the amount of contributions, based on the conditions of transport usage.
In the preparation of both joint and independent contracts, blockchain technology will eliminate the multivariate interpretations and will ensure the transparency of the registry.
In lending and accounting, smart contracts will help to assess risks and conduct audits in real time. They are able to regulate a number of contracts: lease (if there is no payment for a month, the entrance door is locked) and lending (if the payment was late, the car will not start).
Finalizing: the use of smart contracts is limited only by our imagination and technical capabilities.