What is a smart contract?
Have you ever bought a car? A house? If the answer is positive, then you’ve probably encountered difficulties that these types of complex transactions can cause. Numerous industry leaders are trying to find the answers to these inevitable situations. The question arises: Could that be alleviated with the possibility of using a smart contract on the blockchain?
This guide will help you get started even if you only have come to understand the general idea, or you are in search of a more detailed explanation.
The definition is simple.
Smart contracts are lines of codes stored on a blockchain, so whenever conditions and predetermined terms come together, they automatically execute. The bottom level contains the programs that function as they have been created to work just like their developers made them.
The advantages of smart contracts are particularly noticeable in business collaborations, in which they find a place as a certain type of strengthened guarantee where all members can be assured of the result, without any go-between representative engagement.
Why Do We Need Smart Contracts?
Now that you know the basic explanation of a smart contract, you are probably asking yourself about the urge of needing it.
Let’s say you are buying a property, previously applied for a mortgage loan from your bank. Resources authorization and down- payment is a complex process that requires many stakeholder engagements and much of regulatory work. The form that needs to be completed holds classic personal information structure as well as all the go-between agents, signatures, and other information in that matter. All of this takes a lot of time and increases the overall cost. And the main cause is mistrust between all the participants.
Now, move directly to the future where you are buying property again, following the same steps, except that smart contracts are now established as a common process. You can easily identify yourself through digital identity which is saved on the blockchain.
Every successful transaction will be conducted, starting with loan approval way up to the transfer of ownership. In this manner, smart contracts remove the need for trust creating transactions run with more reliability and speed.
How do smart contracts work?
Smart contracts run after previously written logical “if-then” statements on the blockchain, following its structure. When predetermined conditions are all together and verified, a network of computers performs actions such as making funds available to relevant parties, registering a vehicle, informing all the participants, releasing tickets.
The following example will give us a little better idea of how this works.
We have a seller, buyer, shipper, and producer. The seller will contact the shipper so the product can be delivered to the buyer. The deposit money will be released to the seller and shipper when the buyer accepts the item. If the product is not received by the date it should be, the deposit money will be returned. The producer will be notified to create another product that was sold to raise supply. This is all being done automatically.
There can be as many terms as it takes within a smart contract so that the expected achievements meet all required standards between the participants and the outcome. After setting the terms, all including parties to a blockchain platform need to define the way transactions and data are being represented. Then they need to make a consensus on the rules that control those transactions, research all potential exceptions, and determine an exact system for solving disputes
What are the benefits of smart contracts?
The positive effects and the advantages of smart contracts go inevitably together with blockchain.
Speed and accuracy: You could avoid all the errors that are easily made and found in the written documents just by using smart contracts constructed to be automated and digital. Computer codes are more accurate than conventional written contracts are.
Trust: As a result of established rules, smart contracts can accomplish transactions and encrypted records shared across all parties involved. Therefore nobody has a lack of trust questioning if the information possibly has been modified for personal profit.
Security: Each record is correlated to the previous and following one. To hack blockchain transactions, someone will need to change the whole encrypted chain of codes which makes them very hard to hack.
Savings: Saving you time and money. There is no need for go-between agents. All the participants can trust the data visibility therefore there is no actual need for anyone to verify or validate all the terms since it is built into the code.
And what about the legal side?
Smart contracts have enormous potential impacting a wide range of legal spheres, license management, data privacy issues like customer protection for instance. As well as in contract law when it comes to general terms, dealing with invalid contracts; corporate law in regards to decentralized autonomous companies, and similar forms.
Once executed, any smart contract cannot be inverted legally. This could be an issue when dealing with invalid contracts. Even if the participants agree upon the transactions reversing the result of the invalid actions, the void transactions would be stored on the blockchain of the smart contract.
Adjusting the technical and the legal layer deal of all the participants could be the most relevant issue. In other words, aligning the deal among all the participants and the computer code which is decomposing specific parts of the contract as logic if-then statements.
A smart contract can unfold more problems than it aims in the first place if these legal issues aren’t adjusted properly.
Does Your Business Model Require Smart Contract?
As you have seen, smart contracts are likely to provoke a lot of major industries and businesses. We are excited to hear from you if you have an idea for building up your business or just thinking about how can a smart contract apply in your growing business.
At Cyber Bee, we’re a team of blockchain and smart contract development experts who help enterprises and startups design blockchain-based products and develop and implement effective smart contracts solutions.
If you want to you get the best out of blockchain and smart contracts, write up and we’ll take care of the rest.