With the growing influence of the blockchain industry all over the globe, people continue to be exposed to new concepts all the time that sound confusing to some. Smart Contracts are a relatively new technology, powered by public blockchains. Their advantages over the traditional contracts include a lack of need for third parties, saving money and time. But how exactly do Smart Contracts work?
1. What is a Smart Contract?
Nick Szabo, a legal scholar, was the first one to realize the potential of the decentralized ledger in 1994 and how it could be used for smart contracts, known as digital contracts at the time. The concept remains the same even today – a contract is converted into a piece of code, that is stored and monitored by a network of computers, running the blockchain. The network records the execution of the contract, making sure that all of the terms have been met. It then determines who receives the asset and if they be refunded, if the conditions have not been validated.
2. Comparing Bitcoin to Ethereum Smart Contracts
Bitcoin was the first network to support some form of Smart Contracts, as in, transactions will be processed only if the set-up conditions are met. Bitcoin’s language is very restrictive and heavy limited to the currency’s main uses, though. Ethereum improved on the concept, by creating a language, that developers can use to write their own programs. It supports a broader set of instructions, allowing the creation of Smart Contracts, also known as autonomous agents on Ethereum’s White Paper.
3. What are Smart Contracts uses?
Smart Contracts can be used in a wide range of situations, such as financial services, credit enforcement, breach contracts, etc. Their efficiency and security make them popular among some major sectors as well.
For instance, they could be implemented into the voting system, preventing hacking and rigged votes. Smart contracts will provide an extra level of security, due to a system, that requires an impossible amount of power to access and decode.
Healthcare is another sector, that would greatly benefit from the use of Smart Contracts. The personal record can be stored on the blockchain and only certain individuals will have access to them. The system can also store records and keep track of test results, healthcare supplies, prescription drugs, etc.
Smart Contracts find use in some more mundane sectors as well, such as rent and real estate. People can rent their apartments, without the need for any middleman, such as Craigslist, to processes payments and enforce regulations. The only action you need to make is pay via a cryptocurrency and encode the contract on the ledger. The system is profitable not only for individuals but brokers and real estate agents as well.
4. Advantages and disadvantages
Smart Contracts offer some undeniable advantages that make them immensely popular both among the blockchain community and the general public.
- Autonomy – The agreements and terms are set by only the participating parties, removing the need for third parties, such as brokers and lawyers. What is more, the contracts are managed by a network, eliminating any possibility of biases and inaccuracies.
- Safety – Cryptography keeps the data safe and secure, as it is almost impossible to crack the code and infiltrate the network.
- Speed – Smart Contracts are fast and efficient, as the software automates all tasks, eliminating the need for manual processing of documents, which can often take days or even weeks and months.
Unfortunately, Smart Contracts are far from perfect. The most obvious and common problem would be bugs getting in the code, which if not caught on time, might cause a significant level of damage. Lack of regulations could also prove to be a problem since contractors will not be able to seek their rights at court, in case there is a problem with the contract.
Despite all of this, it is just a matter of time before Smart Contracts become part of our everyday lives. That is why experts from all fields have taken it upon themselves to solve all of the major problems plaguing this part of blockchain technology before we fully enter the age of digital, automated contracts.
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