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What is a Smart Contract?

On an evening when Nick Szabo was wondering about the purpose of security around Bitcoins Blockchain, he thought of incorporating software-based protocols to facilitate, verify, and enforce the negotiation or performance of a contract. These software models later were referred to as ‘blockchain smart contracts.

Smart Contracts on Blockchain

The basic purpose behind the inception of Blockchain smart contracts was to allow the performance of credible transactions without involving third parties. Although these transactions are trackable, they are irreversible. The aim of blockchain smart contracts is to provide security that is superior to the traditional contract law and in the meanwhile reduce other transaction costs that are associated with contracting.

Szabo defined blockchain smart contracts as computerized transaction protocols that execute the terms of a contract. He further wanted to extend the functionality of electronic transaction methods, such as POS to the digital landscape.

In 2018, a US Senate report said: ‘While smart contracts blockchain might sound new, the concept is rooted in basic contract law. Usually, the judicial system adjudicates contractual disputes and enforces terms, but it is also common to have another arbitration method, especially, for international transactions. With smart contracts blockchain, a program enforces the contract built into the code.’

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How do Smart Contracts in Blockchain work?

Considering the flexibility, cost-effectiveness, and robustness that smart contracts blockchain have introduced in the realm of bitcoins, they are undoubtedly at the epitome of their adaptability and popularity.

Byzantine fault-tolerant algorithms are the algorithms that allow digital security through decentralization to form smart contracts blockchain. Certain programming languages with various degrees of Turing completeness as a built-in feature of some blockchains make the creation of custom sophisticated logic possible. Some notable implementations of smart contracts blockchain are:

  • For Bitcoins: This cryptocurrency provides a Turing incomplete script language that allows customizing the creation of situation-specific smart contracts blockchain.
  • For Ethereum: Ethereum Blockchain implements a nearly Turing-complete language on its blockchain as a prominent smart contract framework.
  • For Ripple: Ripple’s Codius was another smart contract framework whose development got halted in late 2015. Ripple Blockchain improves major drawbacks attributed to traditional and conventional banking systems.

Have a peek at the image below to understand how exactly the smart contracts blockchain functions.

 

Types of Smart Contracts

There are several types of blockchain smart contracts. They are listed as follows:

  • Assurance Contracts: These contracts assure both sending and receiving parties guaranteed returns on their respective investments.
  • Smart Properties: With smart properties, ownership is controlled by the blockchain and a smart contract. They can be leveraged for digital properties like company shares and ‘access rights’ to an online service.
  • Transferable Virtual Properties: These properties have single ownership at a time. They cannot be controlled by a central authority.
  • Autonomous Agents: Autonomous agents reduce costs by cutting out any middle man. They also discard human interactions and the liabilities that tag along with these interactions.
  • Distributed Markets: These are used for trading securities like stocks and bonds with no centralized clearinghouse.

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Applications of Smart Contracts

There are various ways in which businesses can benefit from Smart Contracts:

  • Medications – Smart Contracts can help in reducing issues with the transportation of medicines. It does that by increasing transparency throughout the supply chain. 
  • Supplier-Retailer Relationship – Smart Contracts help build healthy relationships between suppliers and retailers. It can help in resolving disputes quicker with on-time communication and increased transparency in the supply chain.
  • International Trade – Smart Contracts can help build simpler trading platforms. This would help reduce disputes and help in risk management. 

Benefits of Smart Contracts

  • Contracts are executed as soon as the required conditions are met. Smart Contracts don’t require manual filings and therefore, are more efficient and accurate. 
  • The records of transactions are encrypted before sharing with participants. This makes the whole process more trustworthy and transparent.
  • Since the records of transactions are encrypted, they are very difficult to hack into. The contracts are built into a blockchain, which means that each contract is connected to the previous contract as well as the next one. Any hacker would have to change the entire chain to make changes in one block. This makes Smart Contracts very secure. 
  • There is no need for mediators to handle transactions. This helps reduce the time taken during manual transactions as well as save money on their fees. 

Common issues and challenges with Smart Contract Blockchain

  • Altering a Smart Contract process is a very time-consuming task, almost impossible to do.
  • There is a possibility that Smart Contract terms are not met according to what was agreed upon.
  • Even though Smart Contracts look to reduce the involvement of third parties, it is not possible to keep them completely at bay. 
  • Sometimes contracts include terms that tend to be vague. Smart contracts are unable to interpret them correctly. 

Companies that implement Smart Contracts Blockchain

  • IBM and Sonoco – The companies use the Smart Contracts Blockchain to track pharmaceuticals throughout the supply chain process. 
  • Home Depot – The company uses Smart Contracts to quickly resolve any disputes with the vendor.
  • we.trade – The company uses Smart Contracts to make the trading process simpler and by expanding opportunities for more banks and companies to trade. 

The Future of Smart Contracts

There is a need for more development in Smart Contracts if they are to be used for complex commercial transactions. But at the same time, Smart Contracts can potentially revolutionize how the incentive and reward structure works in contracts. Smart Contracts help us take traditional onto the digital platform, but there could be a lot more achieved in the future from different paradigms.

Smart Contracts Blockchain Conclusion

In a paper that he published in 1994, Szabo proposed the execution of a contract for synthetic assets including derivatives and bonds. He referred to the sale and purchase of derivatives with complex terms.

‘These new securities are formed by combining securities and derivatives in a wide variety of ways. Very complex term structures for payments can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures,’ he wrote.

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