Smart contracts are digital contracts that can self-execute and self-enforce. They are not just an idea, but a technology that is now being developed and implemented. Smart contracts are computer protocols that verify and validate a contract’s terms, triggeringEND its execution if the preconditions are met. END The term “smart contract” was first coined by Nick Szabo in his article “ Smart Contracts: Building Trust in Digital Business ” in 1996, long before Ethereum made it a reality. But what exactly is a smart contract? How does it differ from a standard contract? And why should you care? Let’s take a closer look at what smart contracts are and how they function.
What Are Smart Contracts?
A smart contract is a computer protocol that facilitates, verifies or executes the terms of a contract. Smart contracts can be programmed to execute when certain conditions are met, such as a payment, the receipt of goods or a change in the price of an underlying asset. In short, smart contracts are self-executing software programs that are triggered by something in the real world. In more technical terms, a smart contract is a computerized transaction protocol that can implement the terms of any contract. It acts as a digital intermediary that facilitates and verifies the execution of a contract, rather than having the contract be executed in the physical world.
How Do Smart Contracts Work?
When two parties enter into a contract, they essentially establish a relationship based on trust. A contract is a written or spoken promise that obliges the parties to perform certain actions or deliver certain outcomes, hopefully to the mutual satisfaction of both parties. The contract itself is a written record of the terms agreed upon by both parties and is typically enforced by a legal system. In the case of a dispute, the parties can take their respective grievances to court. Since a smart contract is an automated computer program, it does not require trust. Rather, it is based on a set of rules programmed into the contract that are verified and executed by all parties. In this respect, smart contracts are more like a computer program than a contract.
Why Should You Care About Smart Contracts?
Contracts are a fundamental part of all economic activity. They facilitate trade and investment by reducing uncertainty, risk and negotiating costs. Smart contracts could improve business operations by increasing trust and automation, decreasing transaction costs and enabling more complex contractual arrangements. This could significantly reduce the costs of managing agreements between organizations and improve the efficiency of business processes. Smart contracts could transform the way business is done in several ways. Together with other distributed ledger technologies, they could improve supply chain operations by making it easier to track and trace goods and manage supplier relationships. They could also automate and manage the payment of insurance claims and financial investments.
3 Key Benefits of Smart Contracts
- Trustworthy: A smart contract is based on software code that is unchangeable and exists autonomously. What it does and how it does it, cannot be altered. This makes the contract trustworthy in the sense that it cannot go back on its word. - Autonomous: The smart contract executes itself based on the terms of the contract. The parties to the contract do not have to be involved in order for the contract to be executed. - Cost-effective: Smart contracts can be designed to execute themselves with no human intervention. This can significantly reduce the cost of contractual transactions and the need for lawyers. - 2 Key Challenges of Smart Contracts - Security: How do you ensure that the smart contract is secure? Is the code hack-proof? Given the potential for serious consequences, these are valid concerns. In the future, we can expect that the security of smart contracts will be as highly regulated as financial transactions. - Standardization: The standardization of contractual terms is an ongoing effort. Consequently, a smart contract for a certain service or product is typically dependent on a standard contractual agreement for relevant terms.
As the world becomes increasingly digital, the use of digital agreements will become more common. We are already seeing the first steps towards this in the form of cryptocurrencies, which are digital currencies that use encryption techniques to regulate their creation and usage. And now, we are witnessing the emergence of smart contracts, which can facilitate and execute the terms of a contract. With their potential to streamline business operations, reduce transaction costs and increase trust between parties, smart contracts are poised to become an essential part of the digital economy.