Simply put, smart contracts are computer protocols that have been specially designed to facilitate, enforce, and verify negotiations or the performance and agreement in terms of a digital contract. Also, smart contracts have been designed to ensure that third parties are eliminated from any contract that is entered by crypto network users.
Interestingly, the term “smart contract” was coined in 1994 by Nick Szabo. Those in favor of this life-changing technology have stated that it is capable of carrying out or enforcing almost all types of contracts or agreements. The main aim for the development of smart contracts is to reduce the cost and risks that are involved in creating and agreeing to the terms of contracts that have been entered. Currently, tons of cryptocurrency platforms have adopted the use of smart contracts. Bitcoin happens to be one of the new networks to integrate smart contracts. This is coming after the Segregated Witness upgrade was done on the Bitcoin network.
How Smart Contracts Work
Smart contracts allow network users to carry out transactions and exchange value in a conflict-free, transparent way, at the same time eliminating the need for the services of middlemen.
To get a better understanding of smart contracts, we will have to use a vending machine to explain it better. Generally, you would have to go to a lawyer, wait for a considerable amount of time before you get the needed documents to set up any business to trade with partners across borders. The smart contract is different in the sense that you simply drop a Bitcoin or other crypto in a vending machine (that is the blockchain technology which is a public ledger) and get the needed documents. With smart contracts, you do not have to work with middlemen that often time charge large fees.
Functions Of Smart Contracts
The Ethereum network happens to be one of the first networks to integrate smart contracts. The network allows third-party developers to create decentralized applications and smart contracts. Unlike most of the other networks, the Ethereum network is written in complete Turing language, this makes it easier for developers to create applications on the network. There are tons of things smart contracts can do on the Ethereum network and on any of the other crypto networks. They include;
- Smart contracts can function as multiple signature accounts. This is so that funds can be spent only when the right percentage of people on the network or part of the contract agrees
- Smart contracts help in managing contracts between network users. This is done to ensure that all contracts that are entered are transparent and risk-free
- Smart contracts provide utility to the other contracts that are carried out on the network
- They are capable of storing information about any application or even the registration of domains or membership records.
Use Case Example Of Smart Contracts
Let’s say you rent an apartment through any of the cryptocurrency networks. You would get a receipt which is stored on the virtual contract, a digital key would be presented (this is a sign of ownership) and would be given to you on a specific date and time. If in the event that the supposed digital key does not get to you on time, the blockchain would immediately offer you a refund. If the digital key is sent prior to the agreed date, the blockchain technology would lock it up and wait till the agreed date and time. Once the agreed date is reached, you would get the digital key while the seller would be offered the funds that were locked up. This makes the network transparent, trustless and efficient. Another example will be the fact that with the blockchain technology, now you have the chance to buy a fraction of a property with the aid of tokens. If a property is listed for $1000 and you put up $100 in tokens towards the procurement of that said property, the smart contract protects your interest and guarantees you get your fair share from any revenue the property makes
Smart contracts can be used for various occasions from financial derivatives to contracts, premiums etc. With smart contracts, you are sure of no breach of contract.
Cryptocurrency Networks That Have Integrated Smart Contracts
With the growing need to meet up with the over 1,300 active cryptocurrencies in the market, most of these networks have decided to add additional features that would set them miles apart from their competitors. One of the features, that most users would definitely want to see implemented is “smart contracts”. We will look at some of the cryptocurrency networks that have implemented smart contracts.
- The Ethereum network; launched in 2014, this network seeks to offer third-party developers the opportunity to create decentralized applications and use smart contracts
- The Bitcoin network; initially, this network was not designed to offer smart contracts, but with the Segregated Witness upgrade, the network is now capable of offering it.
Advantages Of Smart Contracts
- Cost-efficient; the use of smart contracts eliminate the need for middlemen in any operation. Generally, these middlemen often times charge outrageous fees. With their elimination, users can be sure of reduced operational expenses.
- Processing speed; it has been recorded that smart contracts work on automated processes and often times eliminates completely the involvement of humans in any of the processes. The lack of human involvement increases the speed of transactions and agreement dates that have been stipulated in the contract.
- Reliable; unlike the traditional contracts, smart contracts are reliable, trustless, transparent and conflict-free. The blockchain technology which works with smart contracts is an immutable ledger which means that all information that is recorded on the ledger cannot be altered or modified by anyone. With smart contracts, if the conditions of the contract are not met by one of the party, the other party would be fully protected by the technology. As mentioned earlier, all smart contract transactions are automated, free of human involvement, this means that it is reliable as there is no room for error.
Disadvantages Of Smart Contracts
- The lack of a global regulation that focuses primarily on the impact of the blockchain technology.
- Generally, smart contracts are quite complicated to implement.
Smart contracts have been designed to ensure that users are able to enter into multiple contracts without fear of contract breach. Smart contracts eliminate any risk or worry that users might face when entering into digital contracts with other users. Smart contracts offer seamless, trustless, conflict-free and transparent contract negotiation and enforcement.
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