DEFINITION:
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.
What is a Smart Contract?
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.
The most common platform for creating smart contracts is Ethereum, which introduced the concept as part of its blockchain in 2015. However, several other blockchain platforms also support smart contracts, including Cardano, Polkadot, and increasingly many others.
Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible. In essence, smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.
Who Invented Smart Contracts?
The concept of smart contracts was first proposed by computer scientist Nick Szabo in 1994, long before the advent of blockchain technology. According to Szabo's original concept, smart contracts are computerized transaction protocols that execute the terms of a contract. With the advent of blockchain technology, his concept became a reality.
What are the Key Properties of Smart Contracts?
- Autonomy: You’re the one making the agreement; there's no need to rely on a broker, lawyer, or other intermediaries to confirm. This also knocks out the danger of manipulation by a third party, since execution is managed automatically by the network, rather than by one or more, possibly biased, individuals.
- Trust: Your documents are encrypted on a shared ledger. There's no way that someone can say they lost it.
- Backup: Imagine if your bank lost your savings account. On the blockchain, each and every one of your friends has your back. Your documents are duplicated many times over.
- Safety: Cryptography, the encryption of websites, keeps your documents safe. There's no hacking. In fact, it would take an abnormally smart hacker to crack the code and infiltrate.
- Speed: You'd ordinarily have to spend chunks of time and paperwork to manually process documents. Smart contracts use software code to automate tasks, thereby shaving hours off a range of business processes.
- Savings: Smart contracts save you money since they knock out the presence of an intermediary. You would, for instance, have to pay a notary to witness your transaction.
- Accuracy: Automated contracts are not only faster and cheaper but also avoid the errors that come from manually filling out heaps of forms.
What are the Use Cases for Smart Contracts?
Smart contracts have a wide array of potential use cases across various sectors.
Here are a few examples:
- Finance and payments: Smart contracts can enable automatic payments once conditions are met. For example, a smart contract could automatically transfer payment to a supplier once a shipment is received.
- Insurance: In insurance, a smart contract could automatically trigger a payment once a claim meets all agreed-upon criteria, thereby reducing the time and costs associated with manual claims processing.
- Real Estate: In real estate transactions, smart contracts could transfer property rights as soon as payment is confirmed, reducing the need for middlemen and making the process more efficient.
- Supply Chain Management: Smart contracts can track products from manufacturing to delivery, ensuring that contract terms are met at each step. This can greatly enhance transparency and efficiency in the supply chain.
- Voting Systems: Smart contracts could ensure that votes are accurately counted and that results are transparent and tamper-proof.
- Intellectual Property Rights: Artists, writers, and other content creators could use smart contracts to enforce their intellectual property rights, ensuring they get paid whenever their work is used.
- Healthcare: Patient records can be encoded and stored on the blockchain with a private key which would grant access only to specific individuals.
- Decentralized Autonomous Organizations (DAOs): DAOs operate completely transparently and entirely independent of any human intervention, including its original creators. DAOs are run by programming code and a collection of smart contracts written on the blockchain.
- Identity verification: Smart contracts can facilitate identity verification in a secure and tamper-proof manner, which can be useful in various contexts, from online login processes to border control.
- Internet of Things (IoT): IoT devices can use smart contracts to make autonomous decisions. For example, a smart contract could refill a smart fridge when it's running low on certain items, based on pre-set user preferences.
Please note that while these use cases hold a lot of promise, the implementation of smart contracts in these areas is still a work in progress and the technology and the legal and regulatory frameworks around smart contracts are still evolving.