Smart Contracts are known to be the base of the blockchain platform for performing different operations.
The technical definitions are always a bit difficult to understand. Let us first try to understand more about smart contracts with the help of a basic example.
Imagine a scenario of a person trying to purchase anything from a vending machine. Here, the buyer puts in the coin and presses the button of the required item. Now, the candy or the item whose button is pressed will be pushed out of the machine through the lever.
If you notice, there was no requirement of any cashier. A smart contract works in a similar manner. There is no need to pay extra fees to an intermediary due to the implementation of smart contracts.
Now, let us understand the technical meaning of smart contracts.
What are Smart Contracts?
Smart contracts are self-executing protocols that contain various instructions as well as terms and conditions within them. These smart contracts are executed on the decentralized platform of the Ethereum blockchain. All the instructions are written in the form of a code in smart contracts.
The terms and conditions of any smart contract are similar to that of traditional contracts. They contain different rules, regulations, and conditions when specific actions have to be performed. There is no person or entity to maintain these smart contracts. Instead, they are simply deployed on the blockchain network and run as programmed.
Smart contracts function in different ways, resulting in the exchange of property, assets, data manipulation, and much more on the blockchain network.
Earlier, a trusted third party executed the agreement between the two parties. Now, the scenario has changed with technology upliftment. Smart contracts can automate this entire procedure and also eliminate manual labor.
The primary function of a smart contract is to programmatically perform business logic and execute various tasks or processes by responding to a different set of conditions.
History of Smart Contracts
Nick Szabo, an American cryptographer and programmer, first came up with smart contracts in 1996. This happened a long time, even before blockchain technology came into existence. According to him, smart contracts are digital protocols that use mathematical algorithms to execute a particular transaction when certain pre-defined conditions are met.
Bitcoin was the first cryptocurrency that appeared in 2008. It was based on blockchain technology. This was when the development of smart contracts became prominent in the technology world. After five years, the Ethereum platform had made it possible to use smart contracts.
Currently, there are plenty of platforms providing the usage of smart contracts, but nothing can overtake Ethereum.
Now, let us understand a bit about the working and functioning of smart contracts.
How do Smart Contracts work?
Smart contracts consist of code that can automatically follow a set of instructions and execute them. They are stored on different blockchain platforms. Now, let us get to the basics of its functioning.
Firstly, the terms of the smart contract are finalized by both contractual parties. Once the terms are finalized, all those instructions are translated into code and programmed. This code consists of different conditional statements that will describe all the possible scenarios for a particular transaction in the future.
The created code is stored as well as replicated among all the participants of the blockchain network. Now, all the computers in the network will execute the provided code. Only if all the participants verify the code and the contract terms are satisfied will the transaction occur.
The code of smart contracts is developed in such a way to perform certain actions when a particular criterion is met. It is not possible for the developers to code complex smart contracts and allow them to perform complex actions. Currently, we can expect smart contracts to execute automatically two types of transactions:
- Ensuring the payment of funds when certain events are triggered
- When certain objective conditions are not satisfied, then the party has to pay financial penalties.
Once a successful smart contract is deployed, there is no need for human intervention for both scenarios. This reduces human labor and also automates the entire process without any chance of errors.
Applications of Smart Contracts
There are a wide array of applications of smart contracts in different sectors. Even when it has not completely evolved, there are still several applications of smart contracts in various sectors, from financial services to healthcare. These applications are going to increase to a massive extent as and when blockchain and smart contracts evolve.
Let us have a look at some of the key applications of smart contracts.
Healthcare and Medication
The main functionality of smart contracts is visible in the healthcare sector. The health records of every patient can be stored with the help of a private key in the blockchain. Only certain authorized personnel should be allowed to access that data. On top of that, smart contracts can also help out in performing research confidentially.
The receipts of patients can be stored on the blockchain network, and the hospitals can even share them directly with the insurance companies as proof of records. Other than that, healthcare sectors can also utilize the distributed ledger to supervise drugs, manage supplies, and regulate compliance.
Another significant benefit of smart contracts can be seen in medication. For instance, if you are wearing a health tracking bracelet, it would register all your blood pressure and heart rate details. If this data is being transferred directly to a blockchain network, you will immediately receive a notification through the smart contract if any parameter crosses the line.
You will be warned if anything wrong can happen to you. This is the most effective application of smart contracts as they can even save a person's life.
Traditional banking services can be transformed in multiple ways through the use of smart contracts and blockchain technology. If we consider the scenario of insurance claims, the banks can directly perform error checking, routing, and transfer payments to the party directly in their bank if everything looks appropriate.
Keeping a record of all the transactions and accounts can be very much simplified through smart contracts. There won't be any issues of data infiltration because of the use of smart contracts. On top of that, the shareholders can even participate in decision-making transparently through the use of smart contracts.
Trade clearing is simplified because once the amounts of trade settlements are calculated, all the funds can be directly transferred to the person's account.
Other than that, there is no need to wait for a few days for your money to be transferred. With the help of smart contracts, you can perform instant money transfers with no fees. With no involvement of a third party, the transactions are pretty cheap as well as fast.
Smart contracts can make it easy to maintain all the tax records without any chances of cheating. People often forget about paying taxes and later on have to pay fines. With the help of smart contracts, tax payments can be automated, and late fees can be avoided entirely. All the data about tax payments is visible on the blockchain network with complete transparency.
Supply Chain and Inventory Management
In the traditional supply chain, everything suffered a lot because of the paper-based system. Every single form had to pass through various channels to get approvals. In this trying scenario, there are plenty of chances of fraud as well as loss.
With the use of blockchain and smart contracts, all these risks can be nullified. Blockchain is successful in delivering a secure as well as an accessible digital version to all the respective parties that are involved in the supply chain. Smart contracts can even turn out to be helpful in managing the inventory and automating payments as well as tasks.
Managers will be able to see real-time stock levels, and the time it will take to move those products in big warehouses with the help of smart contracts. Delivery times can be improved and made more efficient by analyzing everything.
If a supply chain operates in multiple locations, smart contracts can also make automatic reorders and make automatic payments for the received orders. This data can also be used to know the busiest time for any warehouse and how the companies can improve in that area. Other than that, companies will even know which products to stock at different times of the year with clear records available on the blockchain network.
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Smart contracts will ensure that all your payments and earnings are clearly recorded and there's no ambiguity.
Digital Identity and KYC
If you have to pass identity verification, then you have to collect various details about your life. Now, it is a tiresome job because, at some points, you will be asked to provide a considerable number of documents that include your job details, bank records, demographic facts, and much more. So, you will have to run at various institutions to get everything in a single file.
On the other hand, smart contracts can completely solve the problem with the help of digital identity. Here, all the data will be present at a single place in the blockchain network. With this, KYC verification will also become instant. On top of that, your privacy will remain intact because you can control the amount of information that you wish to disclose in front of people.
Other than these applications, there are plenty of other applications of smart contracts in the current technology world.
Now, let us understand why we need smart contracts and some of their key benefits.
What is the need for Smart Contracts?
Smart Contracts have turned out to be highly beneficial to various sectors. Here are some of the key benefits of smart contracts.
Smart contracts remove the intermediaries from the entire process. With this, not only is the cost reduced, but even the transactions become faster.
The most significant benefit of smart contracts is the level of automation it provides. There is no need for human intervention as well as no third party can make changes to the smart contract. Businesses can utilize smart contracts to automate several aspects of their business. On top of that, it can help out in resolving various processes where trust is an issue.
Smart contracts are known to be unique because of their security. All the processes are performed securely, with smart contracts only working as they are intended to work. The data available in smart contracts is immutable, which is why it cannot be altered. All the information in smart contracts is completely secure.
Transparency and Reliability
In smart contracts, all the encrypted records of the transactions are shared with the blockchain participants. So, there are no issues of trust because everything is transparent in front of the participants. Other than that, no participant can tamper with the data available in smart contracts. This is the reason why smart contracts are considered to be more reliable as compared to traditional records.
Smart contracts turn out to be pretty helpful in storing vital information. Even if there is any data loss, you can easily retrieve data from smart contracts as all the details are permanently stored in the blockchain network.
The best thing about smart contracts is that it runs by rules mentioned in the code. If any particular criterion is met, the smart contract will execute the transaction mentioned in the smart contract. So, there is no chance of fraud or any such scenario.
Every single detail has to be mentioned when you are setting up smart contracts and coding them. So, there is no chance of miscommunication or any detail being misplaced because both parties have to write everything. When the communication is clear, you will notice skyrocketing efficiency.
With these benefits, it would be pretty much clear that smart contracts are highly beneficial in different sectors. This is why their importance is consistently rising in the blockchain world.
Currently, there are plenty of blockchain platforms adopting the use of smart contracts, including Ethereum, Corda, Hyperledger, and more. The support of blockchain technologies is constantly growing, and with it, the need for smart contracts in every platform is also growing.
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