Smart contracts are code that executes precisely as intended when both parties have valid access to a contract. The idea is that smart contracts reduce the need for third parties or intermediaries, making transactions more secure and reducing costs. Smart contracts are self-executing contract clauses that facilitate, verify or enforce the negotiation of a contract using the blockchain. In this new edition of our blog, we will explain everything you need to know about smart contracts so that you understand them once and for all.
Let's define a smart contract
A smart contract is a computer code that can facilitate or enforce the negotiation of a contract between two or more parties. It also can self-execute. A smart contract is a type of contract that executes the terms of the agreement automatically based on certain conditions. For example, a contract can automatically transfer ownership of an asset when the states agreed between the parties are met.
How does a smart contract work?
A party to a smart contract creates the terms of the agreement and records them as a computer code. This code is stored on the blockchain. When another party comes along that wants to enter into the contract under the agreed terms, it can access the stored smart contract code and execute it. The blockchain acts as a "transparent counter," recording every transaction between all parties. This allows all contracts to be transparent and auditable.
The future of business with smart contracts
Smart contracts are desirable for industries that are prone to fraud or where contracts such as the collaborative economy may never be enforceable. This is because smart contracts can cut out the intermediaries, making it cheaper and easier to exchange goods.
For example, a car rental provider could create a smart contract that automatically transfers the car keys to the user and terminates the rental once the company has the keys back.
Another possible application of smart contracts is commercial transactions. A smart contract could be automatically triggered, for example, when a construction project is completed or a service is rendered and executes the pre-established terms.
Advantages of smart contracts
- Increased data security: Because smart contracts are designed to execute exactly as programmed, they provide increased data security. Humans are the weak link in traditional contracts. Computers, fortunately, cannot be intimidated or manipulated as easily as people.
- Reduced costs: blockchain cuts out the intermediaries, saving money for both parties. Also, because smart contracts are automated, both parties come out of the deal with fewer problems.
- Future-proof: blockchain is an increasingly important technology in our lives, so in the coming years, we will undoubtedly see more smart contracts everywhere.
- Reduced risk of errors: Smart contracts are designed to execute automatically, so critical mistakes are less likely to be made.
- Efficient collaboration: smart contracts can eliminate inefficiencies by automating business operations and helping coordinate workflow.
Disadvantages of smart contracts
- Lack of trust: as with any new technology, the level of trust has yet to reach its peak.
- Lack of acceptance: According to a survey by IBM, only 13% of companies expect to be using smart contracts in five years, showing that the technology is still in its infancy.
- "Expensive" implementation: Developing smart contracts may seem costly for some sectors unfamiliar with the technology, so the adoption could be somewhat reduced in new industries.
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