Smart Contracts: Why They're the Future of Business and What You Need to Know

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Smart contracts are computer protocols that facilitate, verify, and enforce the terms of a contract. In other words, smart contracts are self-executing digital contracts with the terms and conditions of a contract stored on the blockchain. The primary benefit of implementing smart contracts is trust. Smart contracts significantly reduce intermediary risk and trust parties because they are unbreakable and unalterable once deployed on the blockchain. If you’re considering adopting smart contracts as part of your business, this article will give you an overview of what they are, why they matter to businesses today, and how they can help your company run more efficiently.

What is a smart contract?

A smart contract is a computer protocol that facilitates, verifies, and enforces the terms of an agreement between two or more parties. A smart contract operates under the principle that “what you put in the contract is what you get out of it.” For example, if a business has a smart contract with a supplier, the supplier would be required to ship a certain quantity of goods on a certain date. A breach of contract would result in immediate penalties, such as a fine or a service charge. The important thing to note is that a smart contract is not just a fancy term for a digital contract or an online agreement. Rather, a smart contract is a completely different way of thinking about how contractual relationships work. A smart contract is typically programmed to execute itself automatically given certain inputs. Moreover, a smart contract is unbreakable and incorruptible. That is, it cannot be altered or deleted by any single party because it is hosted on, and functions through, the blockchain.

Why are smart contracts important to businesses?

A business that uses smart contracts is able to reduce costs related to contracting, payment, and auditing. Beyond cost savings, smart contracts have the potential to improve business relationships and trust between parties. Trust is important because parties are usually more likely to enter into contracts with one another when they know they will be held accountable to their commitments. Beyond cost savings, smart contracts have the potential to improve business relationships and trust between parties. Trust is important because parties are usually more likely to enter into contracts with one another when they know they will be held accountable to their commitments. Likewise, businesses are likely to form more long-term and mutually beneficial relationships if they are confident that their partners will keep their promises.

How do smart contracts work?

A smart contract is an application that runs on a network of computers that is programmed to execute when certain conditions are met. For example, a smart contract may be programmed to release payment to a supplier when the supplier submits an invoice and the goods are received. There are many different ways that smart contracts can be programmed, and they vary depending on the blockchain on which they’re deployed. In general, however, a smart contract is programmed to execute when one or more parties in the contract meet their obligations. Given the distributed nature of blockchain technology, many smart contracts are programmed to execute automatically and immediately. That is, the parties don’t need to communicate with each other and there is no waiting for someone to log in and trigger the terms of the contract. Instead, all of the terms are programmed in upfront and the contract executes automatically given certain inputs.

Smart Contract Platforms

There are many different types of smart contract platforms, and the major platforms are Ethereum, NEO, and Hyperledger. Ethereum is the most well-known and widely used platform for executing smart contracts. NEO is a platform that is closely associated with the Chinese government, and it is designed to execute regulatory compliant smart contracts. Hyperledger is a platform that is managed by the Linux Foundation, and it is designed to support a range of industries and business use cases.

Problems with Smart Contracts

Like any new technology, smart contracts do have their share of challenges and limitations. For example, many smart contract platforms are designed to support only a subset of the programming languages that are used by developers to build software applications. That means if you’re a software developer and you want to use a particular programming language, you may not be able to deploy your code on a particular smart contract platform. For example, Ethereum is a popular platform for executing smart contracts, but it supports only a handful of different programming languages. That means many businesses are limited in the types of smart contracts they can execute on Ethereum. Another issue with smart contracts is that they are completely unalterable once deployed on the blockchain. That may seem like a good thing, but it can actually be problematic for businesses. For example, a business may want to make changes to its smart contract after it is deployed on the blockchain. Unfortunately, those changes can’t be made retroactively. Instead, the business must deploy the new version of the smart contract and then immediately publish the old version to the blockchain. That approach is known as “versioning” and it can be challenging.

Key Takeaway

A smart contract is a computer protocol that facilitates, verifies, and enforces the terms of an agreement between two or more parties. A smart contract operates under the principle that “what you put in the contract is what you get out of it”. For example, if a business has a smart contract with a supplier, the supplier would be required to ship a certain quantity of goods on a certain date. A breach of contract would result in immediate penalties, such as a fine or a service charge. The important thing to note is that a smart contract is not just a fancy term for a digital contract or an online agreement. Rather, a smart contract is a completely different way of thinking about how contractual relationships work. A smart contract is typically programmed to execute itself automatically given certain inputs. Moreover, a smart contract is unbreakable and incorruptible. That is, it cannot be altered or deleted by any single party because it is hosted on, and functions through, the blockchain.

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