Blockchain technology has had many applications in the world of finance, used for the improvement and implementing of many economic exchanges. One of said implementations are smart contracts which are digital contracts that use the benefits of blockchain technology to bypass intermediaries like banks.
The term “smart contract” was first coined in 1994 by computer scientist Nick Szabo, but there is a discrepancy between what it actually is and its name, which might be confusing for some. Smart contracts are actually computer codes which are registered on a blockchain, so they cannot be erased or edited. These computer programs can manage digital assets by following a set of imposed requirements by a previous agreement between two or more parties.
Since the appearance of Ethereum, a platform which is specialized in hosting such contracts, more and more people have started showing interest in the appliances of smart contracts.
A traditional contract works by having two or more parties making a voluntary agreement with specified terms issued before, which is enforceable by law of the parties’ state as a binding legal agreement. In contrast, smart contracts eliminate the need of a legal enforcer by not setting the terms, and making sure that once all the conditions have been met. The agreement becomes judicially enforceable upon ratification.
The terms of the transaction are written in a code located in the blockchain and signed cryptographically by the involved parties, the contract remaining to be implemented once the conditions are met.
A cryptographic or digital signature is when all parties sign with their private keys.
The whole transaction is in the blockchain, in code, which means that it cannot be lost or altered.
By being an automated process, it eliminates the need for a legal enforcer to validate the transaction, making it possible for complete strangers to be able to carry out transactions.
Information is transparent, meaning all parts have access to the same information at the same time.
Using smart contracts eliminates the need for paperwork and the risk of fraud, saving time and money and bringing more comfort for those involved.
There are standardized smart contracts which are different type of contracts designed for specific transactions. These can be customized to suit the needs of off the implicated parties.
The unchangeable nature of the blockchain’s code is as much as an advantage as it is can be a disadvantage. People write the code, and if life has taught us anything, is that people make mistakes all the time. Once the code is implemented, it cannot be changed. Human error has left substantial financial damages in the infamous The DAO hacking where $60 million have been stolen.
There are investigations being made to create “escape windows”, which would enable the code writers to pre-program methods that could change the terms of the agreement. But implementing such windows comes with a certain degree of inconvenience, as it is complicated from a technical point of view and would render the smart contracts less effective.
It would be problem if government authorities or institutions started regulating smart contracts. This potential scenario raises a sentiment of uncertainty in those interested in pursuing such transactions.
Companies are at a disadvantage because of the blockchain’s transparent character, as competitors can have access to all stipulated conditions.
Smart contracts cannot be brought to existence if there is no programming. If you are not a savvy programmer, you need to enlist the help of a coder well-versed in the structure of blockchain technology. Such help will prove rather costly for those that want a smart contract free of errors.
Applications and uses
Smart contracts are dependent on cryptocurrencies as they are needed in ordering the required payments. As a result, investment banks could reduce the time spent on performing transactions by more than half, smart contracts posing a real threat for the banking industry.
Voting results cannot be modified once they are stored on the blockchain, and then they would be distributed among the nodes of the network. All data is anonymous, thus eliminating any chance of manipulating the outcome of the election.
The supply chain works by getting information as each link gets confirmation from the previous one if it has kept its end of the contract.
Smart contracts can be used to purchase or rent a piece of real estate. In such cases, the contract would execute the previously established instructions stipulated by the parties.
But one must ask, how do smart contracts know if the transaction has been paid?
Enter oracles. Oracles are computer tools that permit the upgrade of the smart contract’s status by adding external information.
Oracles are used to put the scheduled orders in motion when real life situations that influence the status of the smart contract occurs. Such external information can vary in type, from the value of a specified currency, to the execution method of a payment or a price or temperature variation.
These types of software are still going through a developing process. There are currently being created systems that collect data from various suppliers and conclude which has the most reliable data. In doing so, oracles keep smart contracts from needing a centralized regulation by preventing it from using an intermediary party to verify the validity and accuracy of the provided information.
The potential uses of smart contracts are practically limitless, having a wide range of applications, with the advantages of saving people time and capital. The current lack of legal regulation of the uses of this technology have posed impediments in the process of advancing in this sector. Smart contracts will improve, and along with them, so will the code developers.
A small warning for those interested in pursuing such contracts would be that if you are a not part of the programming world, be very cautious with whom you hire to create your code.
All in all, the Ethereum blockchains are still being used to create smart contracts and decentralized apps to cater to the diverse needs of the masses.