What Is a Smart Contract?
An ordinary financial or legal contract is, as a rule, an oral or written agreement with certain conditions, without the fulfillment of which it loses its force. The state acts as a guarantor of the fulfillment of contractual terms. That is, if one of the parties that signed the contract violates it, it will be held liable. All issues of this kind are resolved in court. Going to court takes time and money.
Another problem of the classical contract is the drafting of the text of the document. Contracts are drawn up by professional lawyers using specific vocabulary. Often, in order to understand the essence of the contract, you have to turn to another lawyer.
At the very beginning of the digital era, there was a reason to create a fundamentally different contract that could regulate the relationship of the parties in the digital environment – smart contract. What is a smart contract? Smart contracts are a program with prescribed conditions, the execution of which it must monitor. The tool allows you to automate many processes.
The creator of smart contracts in the blockchain and crypto field is considered to be the developer Nick Szabo (there is an opinion that he was behind the pseudonym "Satoshi Nakamoto")). He proposed the concept in 1994. The technology gained popularity thanks to the second largest cryptocurrency by capitalization, Bitcoin’s rival – Ethereum. The project solutions allowed developers to start writing virtual smart contracts via the Solidity programming language. The tool survived the second wave of popularity thanks to decentralized finance (DeFi). The technology is supported not only by Ethereum, but also by many other crypto projects, including Cardano.
What Are Smart Contract Examples?
Technically, a smart-contract is a code in which the developer makes certain requirements in advance. For example, let’s say a tenant wants to rent out a home for 30,000 Dogecoins per month. At the same time, he needs money on the 10th day of each month. This information can be put into a smart-contract that automates the process. Here's how it works:
The parties agree on the terms of the contract and define clear requirements. A developer or automated platform that can create smart contracts enters information into the tool and activates it.
Smart contract needs information about the status of the tenant's account. To get them, the system connects to an oracle, a service that helps the program interact with other information sources. When the payment date arrives, the smart contract through the oracle makes a request to the tenant's account. If it has the required amount, the program transfers the money to the wallet of the property owner. If the required amount of assets is not available, the terms of the smart contract will not be met. The system will notify the parties of this.
Before you start working with a smart contract, you need to learn its technical features. In particular, it is important to clarify which cryptocurrency it supports. Otherwise, there is a chance of losing assets.
The good news is that there are practically no restrictions for smart contracts use. They can be used not only to control the timely payment of rent, as in the example above, but also for other tasks.There are many other examples of the use of smart contracts in various industries: from logistics to medicine.
What Are Pros of Smart Contracts Blockchain?
Every technology has its pros and cons. First of all, absolute autonomy speaks in favor of smart contracts: there are no intermediaries here. The parties to the transaction are simultaneously parties to the signed agreements. Lawyers are not needed, there is no need to create special supervisory functions. The machine is responsible for all operations. Thus, any ground for manipulation is excluded.
The second important factor is the complete confidence of the parties to the contract that confidential information is securely protected and encrypted, that is, it cannot be used by third parties for their own purposes.
Another plus of crypto smart contracts technology is the safety of data. The blockchain has the function of multiple duplication and storage of information units in separate links of the chain.
The competitive advantage of a smart contract lies in the speed of transactions. Compared to paperwork and endless approvals, electronic business processes are extremely fast.
An important point is the economy. Working with smart contracts does not require the payment of lawyers, notaries and other add-ons that are involved in the process of negotiating a standard contract in trading or elsewhere else.
An additional bonus is the absence of errors typical of classical workflow standards. There is no human factor here, only machine intelligence.
Thus, smart contracts are a universal technology that allows you to automate many processes. At the same time, the tool has a number of shortcomings that can be eliminated through the formation of a suitable legal framework for it and with the help of a careful attitude to code programming.