Smart contracts (also called distributed apps or crypto contracts) are computer programs that are stored on a blockchain and automatically execute an agreement based on pre-defined conditions.
In traditional contracts, you need someone to enforce the contract, however, smart contracts are programs that execute exactly as they are set up (coded, programmed) by their creators. This way all participants can be immediately certain of the outcome, without an intermediary’s involvement or time loss. Smart Contracts can also automate a workflow, triggering the next action when conditions are met.
Just like a traditional contract is enforceable by law, smart contracts are enforceable by code. In short, smart contracts are a way for people to transact with increased trust, speed, and security.
Here are 2 of my favorite use cases for smart contracts.
Real Estate: A smart contract can be created to transfer the ownership of a property once the full amount has been transferred to the seller’s account. Sellers can take charge of the process. Smart contracts allow for a more transparent and cheaper alternative to property title management. Title defects can get in the way of transfers which result in legal fees. However, smart contracts keep track of a property’s history, location, and all other important details that will be needed for title assessment. They help avoid fraud through encrypted codes that are tamper-proof and secure. This will reduce the expenditure on brokerage and other middlemen and reduce the number of fraudulent activities.
Democratic Elections Process: Blockchain voting systems could be the future of elections. Smart contracts would be able to validate voters’ identities to prevent fake votes or multiple casted votes, a frequent goal of election hackers. Blockchain voting will encourage greater trust in the system, increase voter participation, and speed up the tallying and reporting of votes. For example, many Americans still believe the 2020 election was stolen and this lack of trust in their institutions has led to a fractured society. Blockchain can help mitigate these issues.
Smart contracts can be applied to many different things, not just on crowdfunding. Banks could use it to issue loans or to offer automatic payments. Insurance companies could use it to process certain claims. Postal companies could use it for payment on delivery, and so on and so on…
Benefits Of Smart Contracts
Since these contracts are embedded in the blockchain, they inherit the blockchain’s characteristics and are therefore transparent, immutable and decentralized. (Not to mention transparent and inexpensive)
Being transparent means that every node or participant in Blockchain has a copy of the Blockchain data, they have access to all transaction data. They themselves can verify the identities without the need for mediators.
Being immutable means that once a smart contract is created, it can never be changed again. So no one can go behind your back and tamper with the code of your contract.
And being distributed means that the output of your contract is validated by everyone on the network. So a single person cannot force the contract to release the funds because other people on the network will spot this attempt and mark it as invalid.
Thus tampering with smart contracts becomes almost impossible. Apart from these smart contracts are also cost-effective because they require fewer intermediaries.
A Brief History Of Smart Contracts
An article about smart contracts would not be complete if I didn’t mention Nick Szabo. Nick Szabo was the first person to use the term “smart contract” way back in 1997, long before Bitcoin was created. He is a computer scientist, law scholar, and cryptographer.
Limitations of Smart Contracts
Difficult to change: Changing smart contract processes is almost impossible, any error in the code can be time-consuming and expensive to correct.
Possibility of loopholes: According to the concept of good faith, parties will deal fairly and not get benefits unethically from a contract. However, using smart contracts makes it difficult to ensure that the terms are met according to what was agreed upon. The code will not be able to uphold the spirit of the contract only the letter of the contract.
Vague terms: Since contracts include terms that are not always understood, smart contracts are not always able to handle terms and conditions that are vague.