A contract outlines the terms of an agreement between two parties. A smart contract does the same but is able to enforce those terms with cryptographic code built into its platform.
In the 1990s, legal scholar and cryptographer Nick Szabo laid out the concept of smart contracts with the simple vending machine example – you input data and the digital vending machine produces an item.
With a traditional vending machine, you put in money, and you get a snack or a soft drink. With smart contracts, the basic concept is the same, but the possibilities are endless. They are programmable agreements that can take an input of value or data and produce the outcome that obeys the terms of the contract both sides agreed upon.
Instead of going to a lawyer to mediate the purchase and payment of an asset or service, people can lay out the terms of their agreement in a smart contract without relying on a middleman.
How does a smart contract work?
Let’s imagine you’re selling a house, and you’ve found a buyer. Neither of you want to go through costly middlemen but you also want to make sure both parties respect the terms of the purchase.
You want to receive the money, and your seller wants you to deliver the property deed, so you turn to a smart contract platform. You lay out the terms of your accord: 50 Bitcoins by 1st June or the agreement is void and automatic delivery of the property deed upon payment. Before the agreed date, the seller sends you the agreed amount using the smart contract which then sends him or her the deed. With a smart contract, ownership is undisputed, and clearing and settlement are automated.
What are the benefits of a smart contract?
Traditionally this type of deal would involve some mix of bankers, lawyers and real estate agents but this won’t last much longer. Ethereum is a smart contract platform on top of which hundreds of projects are being developed to eradicate unnecessary costs from these transactions. So far we’ve identified the following benefits.
- Trust: your documents are encrypted in the ledger where they can’t be damaged or lost;
- Autonomy: there is no need to rely on the traditional intermediaries;
- Accuracy: human error is reduced to the point of insignificance, saving you time and money;
- Backup: your records are backed up in every node of the network;
- Speed: smart contracts run on code, so you don’t have to spend hours going through endless stacks of paperwork, and everything runs smoothly, efficiently and quickly.
What are the uses of smart contract?
A significant part of the exciting applications of blockchain technology depends on smart contracts. They can replace intermediaries and clunky business processes in many industries, which will ultimately save a lot of people money and time.
Businesses are often encumbered by slow processes where approval from several departments is required before projects can go ahead. These delays result in real costs that have a negative on the company’s bottom line. They can employ the accuracy, speed and security of blockchain technology to streamline their processes and get rid of inefficiencies in their organisation.
Companies in this field rely on databases of patient information which are too restrictive to allow the sharing of potentially life-saving insights across the globe.
If health records were stored in a blockchain where an individual’s private key safeguarded their anonymity, that information would be available to hospitals and research institutions everywhere. With sufficient adoption, that same individual could walk into any hospital in the world for treatment, and as they produced their private key, the hospital would have access to their information in a heartbeat.
Industries such as banking, real estate or automotive stand to gain from this technology. Every scenario where contracts exist can be made more efficient by the use of a smart contract. As shared, distributed ledgers of information on top of which contracts can be deployed, these platforms can revolutionise the way organisations operate. Smart contracts are even newer than blockchain technology, so applications in this area are still catching up. Stay up-to-date with the latest news at Coin Rivet.
Want to know more about smart contracts? Download our definitive guide.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.