The Ultimate Guide to Smart Contracts

As the world shifts towards digital and automated processes, traditionally manual tasks are being overhauled to incorporate modern technologies. This includes contracts, which may eventually be replaced by smart contracts that utilize blockchain technology.

In general, a contract is a written and signed agreement between two parties on a set of conditions. A smart contract is a digital contract written as a computer program to be executed once preconditions are met. They are helpful in various transactions, such as dispensing a bottle in a vending machine, to more complex cases like real estate or supply chain.

What Is a Smart Contract?

Smart contracts are digital contracts that are defined and programmed in computer code. Additionally, they self-execute when the conditions of a contract are met, removing the need for manual involvement. Recently, smart contracts have gained popularity because of blockchain technology, which provides unprecedented levels of security and immutability. Smart contracts utilize the blockchain’s distributed and decentralized network to store and execute the code written in smart contracts.

Types of Smart Contracts

Fully-programmed smart contracts are called in-code contracts. Conversely, ancillary contracts complement text-based agreements and automate parts of its transaction.

How Do Smart Contracts Work?

Programmers code smart contracts with necessary data inputs and security measures on a smart contract platform. Afterward, they are deployed and encrypted on a smart contract blockchain like Ethereum. The contract is then ready and waiting for specific conditions to be met. Once conditions are met, the smart contract will take action (execute) according to the contract’s directions.

Contracts can also invoke other contracts if stipulated, and all transactions are recorded on the blockchain. These contract transactions are immutable and cannot be modified once recorded on a network, which provides a high level of security.

Examples of smart contract use-cases include, helping identify payments, fulfilling orders, settling insurance claims, and defining financial market actions.

Ethereum-Based Smart Contracts

Ethereum is a public, permissionless blockchain network that launched in 2015. It became notable with its cryptocurrency token, Ether. The Ethereum network is now the go-to blockchain network for smart contract deployment, partly due to its huge community of developers. Additionally, Ethereum’s network is fast, with speeds beating BItcoin’s network. Ethereum-based smart contracts are written in the programming language, solidity.

Benefits of Smart Contracts

• Automated: The contract’s execution is digitally automated, with no manual actions involved.

• Efficient: The absence of a third-party or central agency makes performance much more efficient compared to traditional contracts. Furthermore, contracts are immediately executed once conditions are satisfied.

• Programmable: Contracts become programmable to modify or replicate at scale.

• Trust and Transparency: Blockchains like Ethereum publish transaction data publicly, building trust among contract stakeholders.

• Traceable: All contract executions and transactions are permanently recorded in the blockchain’s network, allowing traceability of events.

• Secure: Neither the smart contract nor transactions on a network can be modified or deleted, as the records are immutable on encrypted, smart contract blockchain networks.

• Cost-effective: Smart contracts eliminate the presence of intermediaries who charge fees.

• Independent: Smart contracts do not require a central authority, legal system, or external enforcement mechanism. However, they can help map legal requirements into an automated process.

Use Cases for Smart Contracts

Smart contracts can be leveraged for numerous transaction-based scenarios in any industry. Cryptocurrencies use a preliminary form of smart contracts for transactions. Some notable use-cases for smart contracts are:

• Supply Chain: Supply chain and logistics involve the movement of goods and the responsibilities of various participants. Smart contracts can be used to help automate this complex process.

• Vendor Relations: Vendor relations, like buyer-supplier, involve contractual agreements that can be deployed as smart contracts.

• Financial: A wide variety of DeFi applications are built with smart contracts. Scenarios like releasing payments or funds based on conditions or financial penalties levied for specific events, actions, or results can be smartly contracted. This allows for fast and secure processing.

• Real Estate: The costs, delays, and ownership criteria in real estate transactions can be written as smart contracts to reduce expenses and increase efficiency.

• DAO: Decentralized autonomous organizations (DAOs) are a collective of users representing a virtual organization without any central authority. A DAO’s community rules and protocols are coded into a smart contract blockchain platform, allowing the organization to operate without human oversight.       

Smart contracts are playing an increasingly significant role in business. Though we are still in the early days of blockchain-based smart contract adoption, companies recognize the multitude of use-cases for the technology and the benefits they provide. The greater efficiency, security, reduced costs, decentralization, and more make smart contracts highly desirable to businesses willing to adopt the emerging technology. As the blockchain continues to gain traction, smart contracts will likely become more prevalent in everyday business operations, and new use-cases will emerge.