When we talk about blockchain, we often talk about ‘Smart Contracts’ which seems to be a bit confusing. People are not aware of what they are and how they work.
What Smart Contracts Are?
Smart Contracts are computer protocol that digitally facilitates, verifies and performs a contract, without any involvement of third party or traditional lawyers. Thereby saving a lot of time and unpredicted conflicts. Smart contracts can be used for the exchange of money, property, shares, or anything that has value transparently while avoiding the services of a middleman.
Smart Contracts (blockchain contracts, self-executing contracts, or digital contracts) were first introduced by Nick Szabo, a prominent computer scientist, and cryptographer in the 1990s. Szabo came up with an idea that blockchain ledger technology could be used for smart contracts. These could further be converted into computer codes and stored as well as replicated on the system.
The first cryptocurrency to support these smart contracts was Bitcoin because its network was able to transfer value from one participant to another. But its programming language was limited to the creation of smart contracts such as payment channels, multi-signature accounts, and time locks. Soon, Ethereal replaced Bitcoin which was built keeping smart contracts in mind.
How Smart Contracts Work?
A traditional contract is drafted by a lawyer which is signed by partaking parties. But in the case of smart contracts, the relationship is set out by cryptographic code. Smart contracts are simply self-executing. It’s written into codes and includes complex if-then statements. So the contract is fulfilled only if it meets the conditions established.
Hence, Smart Contracts eliminates the need for a third party. This means the partaking parties could transact directly with each other.
Let’s understand it using an example:
Suppose you want to buy a can of cold drink from a vending machine. Now, to make a purchase, you’ll need to insert the correct amount. With blockchain, you can simply drop the funds in Bitcoin (cryptocurrency). Once you are done with the selection, the vending machine will push out your order.
These smart contracts can work independently, but they can also run alongside other smart contracts. Confused? Let me help. This means the successful completion of one contract would trigger the beginning of another and so on.
Now, the question arises, whether Smart Contracts would replace lawyers
Smart Contracts have indeed revolutionized contracts across a range of industries but for now, it can’t be said whether it will replace traditional contracts and lawyers. Although it may be possible because here code is the law and lawyers are not required as the code automates the execution of the underlying agreement.
Benefits of Smart Contracts:
Smart Contracts are digital and automated so there are no chances of errors that come from traditional manual forms.
It eliminates the need for a third party (intermediaries, lawyers, brokers or others), giving you complete control over the agreement. Moreover, there’ll also be no danger of manipulation by the third party.
Even if you lose your data, don’t worry because blockchain has duplicated your documents many times.
Smart Contracts are encrypted, they are protected with complex cryptography and hence, extremely difficult to hack.
Thanks to Smart Contract for knocking out the intermediaries. Thereby, eliminating intermediaries’ additional fees and saving you a lot of money.
If you process any contract manually, you’ll have to spend a lot of time in paperwork. But, Smart Contracts uses software code that automates tasks. Thereby cutting off the time required in processing a contract.
You may have complete trust over the shared ledger where your documents are saved because they are encrypted and there are no chances of stealing and data loss.
If you want to learn more about blockchain technology, just contact CDN Solutions Group now!