This article was originally published at: https://www.blog.duomly.com/what-is-smart-contract/
When most people think about contracts, they think about the mundane paperwork task that needs to be completed for two or more parties to exchange goods or services. However, what if there was a way to streamline this process and make it more efficient? Thanks to blockchain technology and smart contracts, this is now a possibility.
In this guide, you will learn what smart contracts are and how they can benefit your business. You will also learn about the different types of smart contracts that are available and how to create and execute them. So whether you are just starting out in business or looking for ways to improve your current operations, read on for all the information you need.
1. What is a smart contract?
In a nutshell, a smart contract is a protocol that facilitates, verifies, or enforces the negotiation or performance of a contract. Smart contracts run on blockchain technology and are what make decentralized applications possible. However, they can also replace legally binding contracts in many instances where two parties interact.
What makes smart contracts so appealing is that they are more secure than what we have today since there is no need for external enforcement. The keys to executing a smart contract are blockchain and cryptocurrency. These two elements make it possible to avoid the risk of relying on another party or one's own ethics to enforce what was agreed upon.
2. How do smart contracts work?
Put simply, smart contracts are pieces of software that contain rules and regulations for negotiating the terms of a contract. These rules are what makeup what is called 'code' in programming. When two parties use blockchain technology to interact with these smart contracts, they help to verify if what was expected has been satisfied. For example, if one person agrees to buy a product from another person for $100 and then send that money over via cryptocurrency, the smart contract will be executed. Once this happens, what was promised is automatically transferred into what's called 'digital code'.
What happens next depends on what type of smart contract has been created. For example, what if one person fails to send over the agreed-upon funds? Then the other party has the option of taking what was initially offered or nothing at all. So there is no need for having third parties involved in disputes since what's agreed upon happens automatically.
3. What are the benefits of using smart contracts?
There are many benefits of using smart contracts, and some of the most notable ones are as follows:
- Increased efficiency: Since there is no need for paperwork or external enforcement, smart contracts can help to speed up the contract negotiation and execution process. This can be a huge boon for businesses that need to get things done quickly and efficiently.
- Reduced costs: Smart contracts can also help reduce costs since there is no need for lawyers or other third-party professionals.
- Increased security: As mentioned earlier, smart contracts are more secure than traditional contracts since there is no need for trust or reliance on another party. This can be especially beneficial for businesses that deal with sensitive data. Smart contracts are what make a blockchain possible, which is a decentralized and distributed ledger system. This means that transactions cannot be altered later, so what's agreed upon is what will be executed.
- Saves time and money: Another way smart contracts save both time and money is by helping to avoid what is known as a 'trust abyss'. This refers to the need for having another party or multiple parties involved in the process. Since blockchain has made it possible for people to interact with one another directly, smart contracts can help eliminate time-consuming and sometimes complicated processes.
- No need for expensive third parties: Since smart contracts are what makes decentralized applications possible, it means that there is no need for third parties. This can be a huge benefit for businesses that don't have the money or resources to hire somebody else to do what's required.
- Transactions are automatic once what was promised is fulfilled: Since what's agreed upon is what happens after a certain set of terms has been met, smart contracts can help make transactions automatic.
4. What are some of the possible uses of smart contracts?
Smart contracts can be used for several different things, and what they're programmed to do depends on what types of rules have been made by those involved in the process. For example, one type is called an 'if-then' contract. This means what happens if a certain set of conditions are met.
Since what these smart contracts can do is limited only by what they're programmed to do, there are many possible uses for them. Just some of what's possible includes:
- Employee compensation: One way that smart contracts can be used is to automate how employees receive what they're owed. When what was promised is fulfilled, the smart contract can send what's owed around without any oversight or intervention from a third party.
- Automated auctions: Making what happens next automatic has also made it possible for online auctions to become much more convenient. This means that transactions can be executed quickly and securely, which increases what are often huge gains for what's sold.
- Holding custody of digital assets: Smart contracts can help to manage what is called digital assets, which includes what has cryptographically been registered along with what they represent. This means that what is owned by another party can be controlled via smart contracts, so what's entrusted in the process is kept safe and what's held isn't lost.
- Deed management: Smart contracts also make what is known as 'tokenization' possible, which means that what has been tokenized can be what is exchanged via smart contracts. This means that what is held by one party in the process can be what they own without what's done on their part.
- Automated voting: Another way smart contracts can be used is for what's known as voting, which means verifying what has been conducted securely. What this means is that what is voted on automatically executes the results of the vote, so another party doesn't question or undertake what happened in it.
5. What are the different types of smart contracts?
There are three main types of smart contracts that you need to know about:
- Crowdfunding Contracts: These smart contracts help individuals or organizations raise funds through cryptocurrencies, making them so appealing for crowdfunding efforts. With these automated contracts, what makes it possible for individuals to contribute money is what's known as an ERC20 token on the Ethereum blockchain.
- Programmed Contracts: This smart contract type provides what is needed for businesses or individuals to exchange money, shares, property, or anything of value in a transparent way. Programmed contracts make decentralized applications possible since what's needed are known as 'decentralized apps'.
- Multi-Signature Contracts: This type of smart contract enables what is known as multi-signature wallets, which make it possible for what will happen to cryptocurrency or other digital assets to be controlled by more than one person.
6. What are some industries that could benefit from using smart contracts?
There are a number of different industries that can benefit from what smart contracts have to offer.
Here's what some of them are:
- Real estate: Since what makes a blockchain possible is what is known as 'immutable', it means that transactions cannot be altered. This is what happens with real estate since what's been agreed upon is what will be executed.
- Architecture: This industry can benefit from smart contracts since what makes them possible is what is known as 'decentralized apps'. These make it a lot simpler for other individuals to verify what has happened, which means that there's no need for other people to get involved in what was expected doesn't happen.
- Insurance: It's what makes smart contracts what they are that what is agreed upon is what will be executed. Insurance is one type of business that could benefit from this since what happens when there's a claim can be automated.
- Legal work: These days, what makes smart contracts possible might seem similar to what people are used to when they receive legal advice, instead of what happens when what is needed has been fulfilled what is executed immediately, which means that what is expected without the need for third parties.
7. What are some of the challenges of using smart contracts?
There are some challenges that business owners might come across if what they're looking to do what will be done is what's expected.
Here are some of what they are:
- Writing smart contracts for blockchain technology might seem relatively new, which means that what has been tested might be what businesses are used to working with instead of what happens on a decentralized network.
- Smart contracts operate on the blockchain, which means that what is in them is what executes what will happen. This is what makes it important to know what is in the code so that what will be executed when triggered can be agreed upon.
- Without testing, there's no way to ensure what happens isn't something else or what was expected doesn't happen if what is written is what will be executed since what will happen cannot be altered.
- The need for what happens when what has been agreed upon isn't what would have happened if a third party was involved, which means that there are a lot of trusts that need to go into what a smart contract can offer.
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If you need what a smart contract can offer and what makes them possible, please don't hesitate to contact us. We have a team of experts who are more than happy to help you with your project.
Thank you for reading,
Radek from Duomly
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