What are Smart Contracts?
Smart Contracts are one of the most important aspects of the Blockchain. One of the biggest Blochachain’s benefits is that it eliminates the middle man. It does this by replacing them with computer algorithms. Smart Contract is one of those Blockchain applications which can eliminate a lot of middlemen one day. It won’t be an exaggeration to say that these smart contracts are capable of replacing lawyers in future.
Smart Contracts does this by using computerized agreements that are stored within the Blockchain network. These contracts can be automatically activated and executed if the conditions provided by the contract creator are met. So basically, Smart Contracts are self-executing contracts which are made in a way to take the resulting action by ensuring the terms of the Contract are met/unmet.
How did it start?
The term Smart Contract was first proposed by Nick Szabo in 1997. He is a Law scholar and a Cryptographer. He proposed this idea in 1997, which is long before the creation of Bitcoin.
In the Picture – Nick Szabo
(Image Credits – Golden.com – Wiki)
Nick’s basic idea was to use a distributed ledger to store contracts. Smart contracts are not so different from the typical real-world contracts. Just that they are entirely digital and are made in such a way that there is no need of third party involvement for the authorization of the contracts to get approved.
Why do we need Smart Contracts?
Smart Contracts can be securely stored and easily accessed by all the involved parties through a decentralized system. If any of the involved parties attempts to change the Contract, the entire Contract will be rejected, and this will be intimated to all the stakeholders automatically. Smart Contracts are extremely easy to use once you know how to use them. They are way too convenient, as well.
Once you know how to make one, you can easily use these contracts in the place of a lot of third parties like document creators, authorizers, lawyers etc. Also, they are extremely cost-effective. Because, typically you would need to pay a document creator, authorizer or a lawyer to generate any required document and authenticate them. But if you know how to use a smart contract, all you will need to do is to pay a small amount of fee and generate the required documentation.
The Smart Contracts are trustworthy, reliable and honourable because of the essential properties that it is built around. They are, also, transparent and immutable. Since these Smart Contracts are stored in a Blockchain, they are distributed, and everyone involved is aware of the terms and conditions of the Contract. The output of the Contract is validated by every single person involved. So they are 100% transparent. Immutability means the ability of the Smart Contract to remain tamper-proof. Meaning, once the Smart Contract is created, it can not be changed. So no one can change the code behind your back or without know knowledge. These properties make Smart Contracts extremely reliable and trustworthy.
A Smart Contract is actually a simple computer program which can be stored inside a Blockchain. Let’s consider a real-life example to understand the working of a simple Smart Contract. You would have booked tickets online for any of the event or a sport you wanted to go watch. To do that, you would have visited an online ticket booking platform, let’s say www.eventbrite.com. Now, the creators of the events must register with this online platform called ‘Event Brite’ and pay them for using their services. Also, the users who go to this website to book tickets must pay an extra charge for website handling & maintenance fee etc.
The critical problem here is the dependency. Event creators, as well as the ticket buyers, need to depend on this third party for the entire process to get through. If the event goes well, and everything falls in place, the event creators expect ‘Event Brite’ to give them the money that got collected. On the other hand, in case the event gets cancelled, ticket buyers would want to get a refund. Both of these parties will have to trust ‘Event Brite’ for this. But with the help of Smart Contracts, we can easily build a system similar to this that doesn’t require any third-party or middlemen like Event Brite.
We can easily visualize a Smart Contract to solve this problem. A Smart Contract can be created in such a way that it holds all the payments and revenues generated by the ticket sales until the event gets over. The ticket buyers can now transfer their money to that particular Smart Contract. Once the event gets over, the Contract automatically transfers the money to the event creators. In the case of event cancellation, the payments received will go back to the buyers who bought the tickets. The most crucial part here is the ability of the Smart Contract to be stored inside a Blockchain. Because of this, the entire Smart Contract is wholly distributed and is visible to everyone involved in it. Hence 100% transparency and no single person/party is in control of the money.
Blockchain technology, without any doubt, is the future. It has its own limitations but not such that they can’t be fixed. Also, they are convenient, faster, extremely cheap, and much more secure than traditional systems. These are some of the important reasons why central authorities, banks and governments are very much interested in them.
‘Smart Contract’ is one of the significant additions to this amazing technology which could potentially change the way we make contracts in the real world as of today. As discussed, Smart Contracts typically allows the performance of complete credible transactions without any involvement of third parties. Hence making it convenient for all the involved parties because it saves money, time and effort.
The applications of Smart Contracts are numerous. Centralized authorities, Banking institutions, Insurance companies, Postal Authorities, etc. are only a few among the many areas where these Smart Contracts can be effectively implemented. More about the applications of Smart Contracts in the upcoming article. Stay Tuned.