What are Smart Contracts on the Blockchain?

The term “Smart Contract” has been gaining plenty of traction in the Crypto space. It is essentially an embodiment of the narratives pertaining to “Code is Law” In other words, it is an automated contractual agreement that involves a settlement between the parties involved in the contract. The conditions and workings of this contract are agreed-upon, predetermined, and unchangeable. The contract also functions efficiently on a blockchain network.

What are Smart Contracts on the Blockchain?

Conventionally, the authority making sure each contract stays within regulations is often lawyers or initiators. However, in the case of smart contracts, code dictates the entirety of the process. It refers to the piece of code that executes on the blockchain automatically and deterministically. This helps automate any contractual dealings with unparalleled security and efficiency.  

With capabilities of receiving funds, sending funds, storing, and integrations, smart contracts also use the “If-then” semantics, making them programmable and easy to use. Nonetheless, they are a work in progress, and it is too soon to make bold claims about their flawless mechanism.

The ultimate aim of introducing smart contracts is to remove any human error or manipulation in traditional contracts. The element of human error makes standard contracts prone to an unfair procedure and subject to unreliability.  

Smart contracts rely solely on the information that the blockchain carries. This information can be a simple exchange where you get a fixed return for what you give, or it can rely on another data source. Depending on an external source can increase the complexity of a smart contract as they will have to rely on real-world data.

The Ethereum network is one example of a blockchain framework that supports smart contracts. It facilitates a programmer to create and implement their own immutable agreement. This ultimately means that you cannot modify a particular contract once you implement it.  

Furthermore, the smart contracts on the Ethereum blockchain are decentralized. This means that there is no third-party or governing authority that is monitoring and moderating the processes of the contract. Instead, each node of the ethereum blockchain stores the same contract information and function in all states.

How do Smart Contracts Work?

To understand how a smart contract works, you can use the analogy of a vending machine, which is often associated with the mechanisms of a smart contract since it shares some similarities. Vending machines work deterministically. It provides you the item equivalent in value to the money you put inside of it, and nothing more than that.  

In other words, when using a vending machine, you are indulging in a contract with a computer program that will only provide you an exchange for your input without the need of a third party. Moreover, there is also no room for negotiations and exceptions. This method of state transitions based on input depicts smart contracts fairly accurately.

Benefits of Smart Contracts?

One of the biggest advantages of using smart contracts is the eradication of intermediaries. Each process of a smart contract is executable and immutable, meaning that it functions without the requirement of a third party. Its features deterministic and automated features eradicate the need for intermediary control.   

Moreover, programmers use programming code to create a smart contract. Once they make a particular contract and introduce it to a blockchain, it begins to implement automatically, without any manual effort. Since the contract runs on a programmed code, it will be limited to the functions you feed into it and will not have the ability to self alternate. 

Running on a programming code also means that it will be significantly faster than a traditional contract. Since all data on a smart contract is on a decentralized network, it is impossible to modify data and breach personal information. This makes smart contracts one of the safest ways to do any financial, business-related, or personal proceedings.  

In addition, the data on the blockchain network, including terms and conditions of a contract, is recorded accurately on the smart contract and registers on the blockchain network. This means that all transactions that smart contracts record will be hundred percent accurate.  

Applications of Smart Contracts

The uses cases of smart contracts are ever-expanding. They range from real estate, payments, finance to crowdfunding and more. Smart contracts are also the building blocks for decentralized applications, which are tools of the decentralized finance ecosystem. Decentralized finance or DEFI is an industry that relies heavily on smart contracts.  

Another potential application of smart contracts is in supply chain management. This involves introducing supply chain protocols that add more transparency to the supply chain procedures. Furthermore, smart contract protocols can also initiate crowdfunding systems by having a protocol that unlocks funds automatically whenever a crowd achieves a particular goal.

You can also find futuristic applications of smart contracts come into the discussion. These include charity, ride-sharing, apartment rental, issuing entry tickets, and more. Smart contracts can optimize any activity that predicates upon the following terms and conditions and involves one or more entities.  

For now, the most probable use case that most people will agree to discuss is the replacement of most financial proceedings into smart contract protocols. This can involve all dealings that involve fund transactions, lending and borrowing of funds, and more.

Where are We Going with Smart Contracts in the Future?

The future for smart contracts looks very promising, and it is not farfetched to believe that most contracts of the future will be automated. Nonetheless, it is still very early to say that there will be mass adoption of smart contracts.

Some even believe that smart contracts, in a fully automated world, will replace lawyers. However, this is not true as lawyers can help implement smart contracts by offering their valuable knowledge over legalities that programmers can translate into code.  

Final Words

A Smart Contract is a contract that functions on a blockchain network, with a fully automated and decentralized mechanism. Not only are they fast, secure, and precise, but they are also cost-efficient and transparent.