Smart Contracts: What They Are and Why They're Revolutionary

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Smart Contracts: What They Are and Why They’re Revolutionary

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what are smart contracts guide

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Smart contracts are the future of online transactions. They will revolutionise how we do everything from buying groceries to sending money overseas.

We’ve already seen the rise of Bitcoin as a form of digital currency. With the advent of blockchain technology, we’re seeing the rise of smart contracts.

These programs run on blockchains and allow 2 parties to make agreements without having to trust each other.

Smart contracts will change how we send money, buy goods, and even live in the future.

In this guide, I’ll explain what smart contracts are, why they’re important, and how to get started building your own.

Before you continue

Before you continue reading this post on smart contracts, we recommend you read more about cryptocurrencies and the blockchain.

Doing so helps you understand how smart contracts work in our explanation later.

Check out our guide on cryptocurrencies and blockchain here.

What Is a Smart Contract?

A smart contract is a computer program that executes automatically when certain conditions occur.

Smart contracts are often called “contracts” because they resemble legal documents. However, unlike traditional contracts, smart contracts aren’t signed by a third party; instead, they execute themselves based on specific rules.

When you create a smart contract, you’re essentially creating a self-executing agreement between 2 parties. The smart contract takes care of everything, including payments, dispute resolution, and enforcement.

Smart contracts can be used to automate many different types of transactions, including financial transfers, property sales, insurance claims, and even marriage proposals.

This makes smart contracts ideal for online transactions, where there is no central authority to enforce the rules.

Smart contracts are also helpful for creating decentralised applications (dApps), which are apps built on blockchain technology.

Blockchain technology enables dapps to be created quickly and cheaply, making them highly secure.

However, smart contracts are still relatively new, and most dApps are not yet fully functional. So far, only a handful of dapps have been released, and none are widely used.

That said, smart contracts are expected to become increasingly popular over the next few years. In fact, some experts predict that within 10 years, smart contracts will replace lawyers and accountants as the primary way people conduct business.

In short, smart contracts are a great idea, and they’re just getting started.

How do Smart Contracts Work?

When you create a smart contract, you specify its rules and conditions. The conditions trigger the execution of the contract, and the rules determine what happens next.

This could be transferring funds between two parties, recording ownership of assets, and issuing digital certificates.

For example, a smart contract could be programmed to pay out $1,000 to anyone who sends a specific amount of Ether to a specified address.

Or, a smart contract could automatically transfer ownership of a house to the buyer after the seller accepts a purchase offer and makes payment.

Basically, if X (condition) happens, do Y (action).

As you can tell, this has the potential to disrupt various industries. We’ll share more detailed examples later.

Types of Smart Contracts

Smart Legal Contracts

Smart legal contracts are computer programs that automatically enforce agreements between parties. They’re used to protect against fraud, ensure compliance with laws, and automate many aspects of contract management. Smart legal contracts are becoming increasingly popular because they reduce paperwork and save time.

They are based on blockchain technology, which is a distributed ledger system that records transactions across multiple computers simultaneously. This means that smart legal contracts are secure, reliable, and transparent.

Smart legal contracts can create automated escrow accounts, track payments, and verify ownership. They can also be used to develop self-executing documents, such as wills, trusts, and deeds.

Smart legal contracts will also help IoT devices communicate with each other and share information securely. This will allow them to interact with each other and perform tasks autonomously.

Decentralised Autonomous Organisations

A DAO, or Decentralised Autonomous Organization, is a community found on the blockchain.

Smart contracts can be used to define these communities and codify their rules.

The community’s rules apply to all participants and their actions, and the community enforces them.

A set of smart contracts monitors activities within the community through these rules.

Application Logic Contracts

Application logic contracts (ALCs) are smart contracts that allow users to create automated agreements between themselves. They’re similar to legal contracts, except they’re not written down and instead rely on computer code to enforce them.

ALCs are a great way to automate repetitive tasks, such as sending payments, sharing files, or transferring money.

ALCs are especially useful for businesses because they allow companies to automate processes without hiring employees. This saves money and frees up resources for other projects.

ALCs are also very flexible. You can easily customise them to fit your needs. And since they’re based on computer code, they work across any device, including smartphones and tablets.

Benefits of Smart Contracts

Here are five benefits of smart contracts:

Reduce Fraud

Fraud is one of the biggest problems facing the world today. For example, over $400 billion was lost due to fraud in 2017 alone.

Smart contracts eliminate the possibility of fraud because they are programmed to enforce certain conditions. If these conditions are met, then the contract will automatically execute itself.

For example, if a person wants to sell his house, he would first write down the terms of the sale in a legally binding document called a deed. He would then record the deed in a public database where anyone can view it.

This ensures that no one can claim ownership of the property after the transaction takes place.

However, this method does not prevent people from forging deeds or claiming that they own the property when they do not.

A smart contract eliminates this problem because it is programmed to ensure that the seller cannot change the terms of the deal after the deed is recorded.

The same goes for real estate transactions. A smart contract could be programmed to require the buyer to pay the seller within a specific time.

In addition, the contract could be programmed to automatically transfer the property title to the buyer if the payment was made.

These types of smart contracts have the potential to reduce fraud significantly.

Increase Transparency

Transparency is another major issue facing the world today. In fact, many countries around the globe still lack transparency.

Smart contracts provide a way to increase transparency because they are programmed to make information available to everyone.

For example, a smart contract could be programmed so that every time a transaction occurs, the transaction details are posted publicly.

This allows anyone to verify whether the terms of the transaction were followed.

Furthermore, smart contracts can be programmed to post the results of elections online immediately after voting ends.

This provides voters with instant access to the results of their votes. It also prevents election fraud because it makes it impossible for anyone to alter the results after they are posted.

Improve Security

Security is another big concern facing the world today. Hackers steal millions of dollars worth of cryptocurrency each year.

Smart contracts can improve security because they are programmed to protect against hackers.

For example, smart contracts can be designed to encrypt sensitive data before it is stored on the network.

This prevents hackers from accessing the data.

Moreover, smart contracts can be coded to use advanced encryption techniques to secure private keys.

Private keys are the cryptographic codes that unlock digital assets like cryptocurrencies.

Hackers can easily steal these keys if they get hold of them.

However, smart contracts can be written to use advanced cryptography to create unique private keys that are extremely difficult to crack.

Eliminate Third-Party Intermediaries

Third-party intermediaries are expensive and often slow down transactions. With smart contracts, there is no need for third-party intermediaries.

Instead, the parties involved can communicate directly with one another. This eliminates the need for costly middlemen and speeds up transactions.

Provide Accessibility

Smart contracts increase accessibility by allowing anyone to use them. Anyone can create their own smart contract and deploy it onto the Ethereum network.

Once created, smart contracts are available to everyone. There is no cost to access these contracts.

Anyone can interact with a smart contract via its interface. The interface provides information about the state of the contract and allows users to send messages to the contract.

Create New Business Models

Smart contracts can be used to build entirely new business models. For example, smart contacts can be used to manage intellectual property.

The owner of a copyrighted work could program a smart contract to automatically license the work to others.

This way, the copyright holder would receive payment for each copy of the work sold.

Sounds cool? Well, that’s what an NFT can do.

Not just your typical JPEG like what everyone thinks it is.

Smart contracts can also be used to track the movement of physical goods. A manufacturer could program a smart contract to track the shipment of products.

When the product arrives at its destination, the smart contract could trigger payments to the appropriate parties.

Smart Contract Risks

Security Issues

Security issues are one of the main reasons why smart contracts haven’t taken off yet. Smart contracts are vulnerable to hacking attacks, which means hackers can steal money from investors.

Hackers can also change the terms of smart contracts, causing problems for users. For example, hackers can force a company to pay out funds to another party.

There are several ways to protect against security issues. One way is to develop smart contracts using open-source software. This makes it easier to audit the code and find vulnerabilities. Another way is to use multi-signature wallets, which require multiple parties to sign transactions before they are sent to the blockchain.

Lack of Trust

Smart contracts are still very much in their infancy. There aren’t many smart contracts currently available, and most of those existing are still in testing phases.

This means that people don’t trust them yet. Many believe smart contracts are too risky to implement into their business models.

However, once more companies develop smart contracts, more people will become comfortable with them. In fact, I think that within 10 years, everyone will be using smart contracts.

Unpredictability

Smart contracts are designed to execute automatically. But what happens if something goes wrong? What if the network crashes or if the developer stops updating the code?

These questions are difficult to answer. If a smart contract fails, it could cause severe damage to the user.

For instance, imagine a smart contract that pays out $100 to anyone who sends a certain amount of Ether to a specific address. The problem is that the developer may stop updating the code, so no one knows whether the contract will continue working correctly.

Complexity

The Ethereum platform is complex. It contains thousands of lines of code that must be written correctly.

It takes a lot of effort to write smart contracts. And since smart contracts are still in their early stages, developers don’t know exactly what kind of bugs they will encounter.

As more smart contracts are developed, the complexity of writing these contracts will decrease.

Cost

Developing smart contracts isn’t cheap. It costs hundreds of dollars to hire programmers to write smart contracts.

Even though smart contracts are becoming more popular, they are still relatively expensive.

So, if you want to start developing smart contracts, you should consider hiring a programmer to create them.

Blockchain Technology

Blockchain technology is the backbone of the entire cryptocurrency industry.

But some people believe that blockchain technology is unnecessary for smart contracts.

They say smart contracts can be implemented using existing technologies, such as databases and programming languages.

This is true. If you’re a programmer, you’d know that smart contracts can be similarly programmed using if-then statements.

But I disagree with the statement that blockchain is unnecessary.

Blockchain technology provides several benefits that make it ideal for smart contracts.

First, it’s decentralised. Unlike traditional databases, blockchain doesn’t require a central server.

Second, it’s secure. Because blockchain uses cryptography, it prevents unauthorised access to data.

Third, it’s immutable. Once data is entered into the blockchain, it cannot be changed or deleted.

Finally, it’s transparent. Anyone can see all information stored on the blockchain.

With blockchain’s benefits, it takes smart contracts to a whole new level with the potential for disruptions.

Real-World Examples/Uses of Smart Contracts

Payroll

Smart contracts are also helpful in automating repetitive tasks. For example, imagine you own a restaurant. You’d like to automate the process of paying your employees every week.

Instead of manually entering each employee’s paycheck into a spreadsheet, you could create a smart contract that automatically calculates each employee’s weekly salary and sends out the checks/payments.

Real Estate

They’re handy for real estate because they can be programmed to perform actions like escrow accounts, title searches, property inspections, and more.

Smart contracts can help streamline real estate transactions, saving time and money. And they can save buyers and sellers from dealing with lawyers, agents, and other third parties.

Smart contracts are already being used in real estate, including buying and selling homes, renting apartments, and managing rental properties. But there are many more uses for smart contracts in real estate.

For example, smart contracts can be programmed to pay rent directly to landlords, collect payments from tenants, and handle insurance claims automatically.

Insurance

Insurance companies can use smart contracts to automate claims processing. They’re used to verify coverage and payment and ensure that payments are made promptly.

They’re also used to prevent fraud and abuse. For example, when a policyholder files a claim, the insurer uses a smart contract to automatically pay the claim.

The insurer doesn’t need to manually review each claim (that involves many individuals and takes a lot of time), because the smart contract verifies the claim automatically.

If the claim isn’t valid, the smart contract notifies the insurer, who can investigate further.

This process eliminates manual work and reduces errors. It also allows insurers to offer lower rates to policyholders because they no longer have to spend on labour costs.

Smart contracts are just one way blockchain technology can be applied to insurance. Other applications include identity verification, risk management, and reinsurance.

If you look into the different real-world uses of smart contracts, you can see a repeating pattern.

It’s mainly used to reduce repetitive tasks and eliminate the need for middlemen.

How to get started with smart contracts?

To create a smart contract, you need to write code that defines the rules of the transaction. This code is stored on the blockchain, and anyone who wants to access the contract can view its source code.

Once you’ve written the code, you must deploy it to the blockchain. To do this, you must send the code to a special address on the blockchain. Once deployed, the code executes automatically.

This means that smart contracts allow you to automate complex processes and eliminate the need for intermediaries. They’re ideal for situations where trust is required, such as escrows, crowdfunding campaigns, and peer-to-peer lending.

There are many different types of smart contracts. Some are designed to be used only within specific applications, while others are open-source and available to everyone.

What are some blockchains that support smart contracts?

Here are some examples of blockchain platforms that support smart contracts: Ethereum – Ethereum is a public blockchain platform that supports smart contracts.

It was developed by Vitalik Buterin, a programmer and co-founder of cryptocurrency startup Ethereum.

The name “Ethereum” comes from the Greek god of fire, and the platform uses a virtual machine called the Ethereum Virtual Machine (EVM).

When searching for a blockchain that supports smart contracts, you can see if they leverage the Ethereum Virtual Machine for smart contract functionalityies.

Other blockchains that support smart contracts as projects such as Solana, Polkadot, Avalanche, Algorand, and Cosmos.

You can program your smart contracts on these platforms or look for dApps that allow you to build them.

Conclusion

In conclusion, smart contracts are a relatively new technology that allows users to create their own digital transactions without relying on third parties like banks or exchanges.

They’re essentially programs that run on blockchain networks and allow users to set rules around how their funds are used.

While they’re still relatively new, smart contracts have already proven useful in several industries, including finance, healthcare, and real estate.

In fact, they’re so powerful that they’re often referred to as the next generation of the internet.

They’re powerful tools that can help us solve problems we didn’t even know existed – imagine not having to wait weeks to get your insurance claims.

I hope this post has been useful in helping you understand more about smart contracts and why it makes blockchain so powerful.

If you’re interested in investing in cryptocurrencies, here’s our comprehensive guide to get you started.

Disclaimer: Each article written obtained its information from reliable sources and should be purely used for informational purposes only. The information provided by Dollar Bureau and its affiliated parties is not meant to be construed as financial advice. Dollar Bureau shall not be held liable for any inaccuracies, mistakes, omissions, and losses incurred should you act upon any information listed on this website. We recommend readers to seek financial planning advice from qualified financial advisors. 

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