What is a smart contract? — Understand contracts on the blockchain

Blockchain is widely considered to be a speculative good thing, made famous by Bitcoin. But the underlying technology is more interesting in many ways. A smart contract is a smart contract that does not require a third party such as a lawyer, notary or public official to verify, facilitate or enforce the contract.

This literally means you can have fast, reliable and trustworthy transactions with any third party without the constraints of ordinary contracts — and yes, it even saves attorney fees.

One of the most popular networks for smart contracts is Ethereum, but solutions on classic blockchains (or derivatives called sidechains, especially contracts), or other projects can also be used. There are many different networks that can be used, Bridge Smart Contract Development Services and each protocol has its own advantages/disadvantages, as there will always be tradeoffs between security (data security and integrity), scalability (speed, capacity, throughput and latency) and going Tradeoffs between centralization (accessibility, usability, and transparency).

If you’ve ever wondered what such a smart contract looks like, here’s an example of an Ethereum-based vending machine code.

Advantages of Smart Contracts

In the introduction, I have mentioned some key aspects of digital contracts based on blockchain technology. But the list of advantages is longer, and I’ve given some insights so it’s easier to understand why smart contracts have so much potential.

1. Trust

With every transaction, it is important that both parties have trust that the transaction will actually succeed. Due to the unique way information is stored in blockchain, where many computers share information and independently verify it, so-called “distributed ledgers” can be used, Cross chain bridge development and this information is valid and cannot be lost. So the contract will exist in the future, and it will not be modified.

2. Backup

Due to the mechanism of storing information in a distributed ledger, it must also be mentioned that there are many replicas in the network. This ensures that all created files and all executed contracts have redundant backups.

3. Autonomy

It is completely autonomous as the network handles handovers and contract terms. In order to trade successfully, you do not need banks, brokers, lawyers, regulators or other intermediaries. In this way, you can build your own contracts and not be subject to local restrictions or the fees involved in transaction verification.

4. Speed

Traditional contracts can take a significant amount of time to process, validate, and even communicate with third parties. A blockchain-based network could speed up the process to hours or near real-time transactions. This is especially important when you have small transactions that need to be verified quickly (such as car rentals, travel insurance, etc.).

5. Fees

As you can imagine, contracts that do not require notarization or witnessing are cheaper. This also applies to smart contracts. When contracts are executed and verified by the network rather than a third party, the cost per transaction becomes lower. This is especially important if you want to “tokenize” your assets. There, you break large items into smaller pieces. (for example, share of buying a house)

6. Automation

One of the great advantages of smart contracts is that they are “smart”. This means that you can also ensure that complex structures of contracts are met, and you have traceability not only of documents, but of goods. An example involves international shipping, where goods flow through different legislation, cross different borders, and insure with different insurance companies, all of which need to be managed in contracts, so it’s legal. This often involves long contracts and a lot of paperwork — all of which can be automated and tracked through smart contracts.

7. Encryption and Security

Another important role is of course secure transactions. Not only does this mean that files and contracts are restored to storage, but it also means that information can only be accessed if someone is allowed. Use very secure network protocols and cryptography and other layers of security to ensure that only relevant parties can access the information.

8. Accuracy of the contract

Last but not least, when dealing with intermediaries or dealing with manual paperwork, many mistakes can occur. This might be a small factor, but it’s also worth mentioning because there’s a better overview, and therefore better accuracy, enforced contracts.

Smart Contract Use Cases

Due to the unique facts of smart contracts, there are many industries and topics that may benefit from these types of contracts and contract enforcement. I’ll just list some examples. For a more detailed list, I recommend Build a cross chain bridge this article. Blockchain — Possibilities, applications and use cases of distributed ledger technology.

- government

Safe and trusted transactions certainly have government uses as well. Especially when you think of applications that involve validation in any way. The best example is probably voting, having a credible vote is crucial to avoid voter fraud, but on the other hand, ensuring this integrity is very complex when done offline. Here, it would be beneficial to introduce a digital identity that would allow only one vote and be open only to the person themselves.

- supply chain

Especially for large corporations with global supply chain networks, it is very beneficial to have a digital track record of every transaction. As a result, it is not only possible to automate the process, but also to trace every stage of the product. This will increase transparency, can help identify bottlenecks, and also help manage a large number of contracts.

Another situation is when the shipment arrives and the payment is being processed. This provides the sender and receiver with security of contract execution, as the transfer of goods is only possible when the payment is processed. This also means that such transactions do not require trade finance.

– real estate

From transferring the property to the buyer, to granting the right to use the property. Contracts are involved in every real estate transaction. Smart contracts can help limit the associated risks and costs. For example, you can rent out your apartment to someone for a few days, and his NFC chip will only work if payment is provided. When the renter does not transfer money, he cannot enter the property.

Also in real estate transactions, the property can only be transferred after payment has been made, which is also advantageous. With smart contracts, you don’t need an intermediary like a bank or a notary office to process the payment before releasing the property, you can do it directly without waiting time.

- medical insurance

I mention this issue here because it is a big problem for many countries. “Who can access my patient data?”, “Is my digital patient file secure? As we have learned, smart contracts are beneficial if only a limited number of people need access for a limited time. This also means that your profile is always with you and you will only share it if you allow a doctor to view it for a certain period of time. The same goes for prescriptions, which cannot be changed, test results cannot be changed, and insurance claims can be made automatically.

In highly regulated activities, such as drug storage and distribution, compliance costs can be high. Smart contracts can ensure trust, traceability, but can also secure a lot of administrative costs.

Disadvantages of smart contracts

Of course, they are far from perfect. Because they are based on software, there are also potential bugs, network costs and other issues.

Another thing to mention is the current lack of regulation. There are currently no real guidelines and laws governing smart contracts. This means there are no backups either. When you rent a car with a blockchain auto-contract, there is an error in the payment, then your car may not be accessible, or even be rented to the next person before you even react — remember, There is no middleman to mediate.

It’s also worth mentioning that these contracts are enforced no matter what happens. If you set the wrong condition, it will execute no matter what happens.

This is also true when it comes to data privacy. On the positive side, there is no data loss in the blockchain, but when it comes to personal data, it can also be a downside. This is also an unresolved public issue that personal data cannot be deleted.

Evaluation of smart contracts

The past few years have seen rapid development, mainly driven by upcoming speculation based on so-called cryptocurrencies such as Bitcoin, Ethereum, etc. The adoption of smart contracts based on blockchain technology has been a bit slower, but there are also the first successful use-case implementations. With new platforms and an easier-to-use web, we’re likely to see a better development and wider adoption.

For many industries, it’s worth taking a look at the potential applications. This is very important to do to determine the correct use case, what information needs to be stored on the blockchain. Maybe you want to keep transactional and personal data safe (beware of data privacy concerns!), but you don’t need to store large datasets like pictures and videos, which may not be critical.