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If you have been doing your research about cryptocurrency and blockchains, you would have come across “smart contract” multiple times. But what exactly are smart contracts? Where can you use smart contracts and why is everywhere when you look for blockchains?
What are smart contracts?
Known as digital blockchain or self-executing contracts, they are computer codes stored on the blockchain which will execute functions upon fulfillment of specific conditions. In other words, smart contracts are the modern versions of their traditional counterparts. With traditional contracts, both parties will have to sign a piece of document in the presence of a third-party for it to be valid. Without middlemen such as notaries or lawyers, smart contracts are no longer valid. Also, you will have to a pay a fee to these middlemen for the traditional contract.
Smart contracts get around this problem by eliminating third parties completely. You can enter into a smart contract with another person. It will enforce all the penalties and rules automatically. After both parties fulfill certain conditions, it will activate the codes in the smart contract and execute them accordingly.
Functioning of smart contracts
Unlike traditional contracts, you cannot be ambiguous about the terms and conditions in their smarter counterparts. Smart contracts come with specific codes which will trigger based on the actions of two parties. After the creation of smart contracts, they get shared to all the computers in the blockchain, through blockchain transactions. All the computers in the network validate the transaction and store it in the blockchain as a new data block. Since the data block becomes a part of the blockchain, no one can change the contract or the transaction. The trigger actions which activate the contract depends on external events.
To explain the functioning of a smart contract properly, here is an example. Imagine you are buying a house from another party. The party agrees to hand over all the documents for the property, provided you can match the selling price. Also, you and the other party agree to complete the deal by the end of the week. If you transfer the money to the other party, but he/she doesn’t hand over the documents within the specified time, it nullifies the smart contract and returns the money. Similarly, if the other party gives you the deeds, but you don’t transfer the money within the deadline, the documents will go back.
Advantages of smart contracts
When you use smart contracts, you will observe the following advantages:
As you are the one behind the agreement, you won’t have to depend on intermediaries such as lawyers, notaries, or brokers to validate it. As a result of this, no one will be able to manipulate the conditions of the smart contract.
As discussed earlier, you no longer need a third party to validate the smart contract. As there are no more third parties, you won’t have to pay them additional fees for validation. Over time, smart contracts will save you large sums of money.
Traditional contracts are prone to mistakes due to human error. However, smart contracts activate only after the involved parties meet the conditions. Also, errors that arise due to filling up multiple pages get eliminated.
If you go for traditional contracts, you will have to spend a large portion of your time waiting for the manual processing of all the paperwork. With smart contracts, it will only take a couple of seconds for automating tasks. As a result of this, you will save countless hours with smart contracts.
Thanks to cryptography, your documents/files are safe and secure from the hands of hackers. Due to hashing, it requires a lot of intense work from hackers to break the code. No hacker will want to spend a significant portion of their time to break into a smart contract, which may get executed by that time.
You never have to worry about the smart contracts getting lost due to unknown reasons. As blockchains consist of a network of computers, it stores in all of them.
Uses of smart contracts
Many industries stand to gain significantly with the use of smart contracts. For starters, the entertainment industry will witness a huge change due to smart contracts. For example, there are a lot of problems when it comes to handing out royalties. With smart contracts, keeping track of ownership rights becomes easy. Payment of royalties can happen instantly, avoiding any delays that may take place due to traditional contracts.
Another industry that stands to gain considerably from smart contracts is logistics. With the help of smart contracts, it becomes easier for everyone involved in the supply chain to keep track of all the packages and products until delivery. If there are any discrepancies in the supply chain, real-time data will help in pinpointing the ones who are responsible for it.
Smart contracts have a huge potential to help industries all over the world due to the numerous advantages they possess. Also, smart contracts will make life easier for all parties. Smart contracts are the future!
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