Skip to content

Smart Contracts

What is a Smart Contract?

A smart contract (i.e. automated self-enforcing contract) is a piece of computer software that initiates a certain activity when the circumstances are satisfied. For instance, smart contracts may be used to mediate the trade of cryptocurrencies (or any other digital asset) between two parties. In other words, smart contracts are essentially lines of code that run when certain criteria are satisfied, performing a certain purpose.

The agreements and underlying code are spread throughout a decentralized blockchain network. Transactions are traceable and irreversible, and the code regulates their execution. Smart contracts enable trustworthy transactions and agreements to be made between dispersed, anonymous participants, without the need for a centralized authority, a legal system, or an external enforcement mechanism. Hence, a smart contract may describe the transaction's mechanics and serve as the final arbitrator of the terms. Because of this, smart contracts have evolved into the foundation of a complete ecosystem of decentralized apps (i.e. dApps) and are now a key area of focus for blockchain development as a whole.

Simple if/when, then words encoded into code on a blockchain are the basis for how smart contracts operate. When predefined circumstances have been verified to have been satisfied, a network of computers will carry out the actions. These can entail paying out money to the right people, registering a car, sending out notices, or writing a ticket. When the transaction is finished, the blockchain is then updated. As a result, the transaction cannot be modified, and only parties to whom permission has been granted can view the outcome. Smart contacts, therefore, allow intermediaries such as banks and central authorities to be bypassed, as the contract is written onto the blockchain, and once written on the blockchain, these are irreversible. This means they are ideal for automating and decentralizing transactions and deals, and indeed are really the key to making dApps work on the blockchain.

What makes these contracts smart is their ability to execute a well-defined logic in response to particular conditions which are explicitly stated in the contract, and, because such conditions to be met are visible to everyone and can not be modified. This leads people to have confidence in the smart contracts, even in circumstances where they do not otherwise know each other.

In the context of the blockchain and cryptocurrency markets, smart contracts are crucial, especially in relation to ERC-20 tokens, which are a subset of tokens produced on the Ethereum network that adhere to the ERC-20 standard. The financial services sector is another use for smart contracts. For instance, this technology might be used to automate the computation and payment of insurance claims as well as the clearing and settlement of trades. Smart contracts, although their apparent uses in finance, are adaptable enough to be used in almost any sector where money, digital assets, or any type of digital information has to be moved between parties. For example, the equipment leasing sector has extensively used these contracts in the real world to streamline lease arrangements.

Their application is also being investigated in the healthcare industry as a defense against data tampering in clinical studies. By creating a clear record of shared ownership rights and dividing all royalties and revenues from intellectual property accordingly, smart contracts may even be used to enforce intellectual property agreements.

Benefits of Smart Contracts

There are different positive features of smart contracts:

  1. Speed, Efficiency, and Precision: the contract is promptly carried out if a condition is satisfied. Smart contracts are digital and automated, so there is no paperwork to complete or time wasted fixing mistakes that frequently occur when documents are filled out manually.

  2. Transparency and Trust: there is no need to wonder whether information has been changed for one participant's personal gain because there is no third party engaged and participants exchange encrypted records of transactions. Smart contracts are written in a way that does make disputes extremely rare, indeed they are designed to avoid them entirely.

  3. Security: because the blockchain transaction records are encrypted, these are incredibly difficult to hack. Additionally, hackers would need to alter the entire chain in order to change a single record on a distributed ledger since each record is linked to the records that came before and after it.

Drawbacks of Smart Contracts

There are three key negative features about smart contracts:

  1. Legal Status: smart contracts lack any legal status. This may be largely caused because the technology is so new, and most legal jurisdictions have not yet updated their guidance on smart contracts and legislation if required is usually not yet in place. This is an area that is likely to change in coming years.

  2. Difficult to Change: once a record has been written to the blockchain it is impossible to change or delete it. Therefore, if a smart contract has been issued in some way incorrectly, then changing it is almost impossible. You would be able to issue another contract that effectively would reverse the effect of the incorrect contract, but that would not necessarily be easy.

  3. Need for Precision: smart contracts do not work unless they are written in an extremely precise way. In fact, there can not be any ambiguity or vagueness in their terms.

Use Cases

Finance

DeFi dApps are a strong substitute for conventional financial services, and their acceptance is rising as a result of the irreversible, transparent, and trustless properties of blockchain and smart contract technology.

DeFi dApps provide whole new sorts of goods and decentralized business models that may be of great use and utility for consumers, in addition to parallel services to the banking and financial services sector like lending, borrowing, trading, and a variety of other financial activities.

DApps have the ability to lower the barriers to entry into the financial services industry for individuals all over the world because of the improved transparency provided by smart contracts (combined with 24/7 functioning, and cheaper prices). The implications of smart-contract-powered dApps on the financial industry are already apparent, despite the DeFi sector's relative youth given the amount of creative dApps that are currently offering users value and usefulness.

Gaming and NFTs

The worldwide gaming market is a $100 billion ecosystem that is expanding swiftly, yet the way wealth is produced and dispersed within the market may often be unfair. Games are created and released by developers, and users pay to access and participate in such games. As a result, gamers continue to pay money to gain access to in-game resources and gaming options, perpetuating a one-way flow of value.

In contrast, blockchain technology in gaming can help gamers more effectively realize the value and usefulness of in-game purchases and asset purchases. Non-fungible tokens (i.e. NFTs), which are distinctive digital assets that stand in for in-game content, are frequently the engine behind blockchain technology in the gaming industry. Smart contracts are crucial to NFTs. The blockchain networks that support NFTs provide player ownership, proved scarcity, interoperability, and immutability, while these tokens are unique, uncommon, and indivisible. These features of blockchain in gaming might promote widespread adoption and a more equal value model when taken as a whole.

Healthcare

Another sector that has started utilizing blockchain technology for safe, trustless, and transparent data sharing is healthcare. The incorporation of smart contracts and full decentralized applications (dApps) created to address important healthcare pain points like interoperability, identity, and authentication issues may help strengthen the connection between blockchain technology and healthcare.

Identity Management

In order to increase security and lower the likelihood of data mismanagement or a breach, Digital Identifier (DIDs) smart contracts built on distributed ledger technologies offer people complete ownership over their data and let them share the content of their data as they see fit. For identity management, smart contracts help to ensure and facilitate: identity protection, the information the user wants to share, and KYC verification

The ability of smart contracts to serve as legally enforceable contracts, the sort that govern the majority of today's commercial interactions, is one of the most exciting real world use cases. Most recently, with the introduction of e-signatures for legally binding agreements, technology has been pushing innovation in the legal sector. Another recent development in this area is the emergence of smart contracts, which might soon provide parties to legal agreements with a choice and perhaps reduce the expense of engaging attorneys and other middlemen.

Machine Learning and Artificial Intelligence

The capacity of blockchain technology and related smart contract technology to simplify difficult computing operations like those involved in machine learning and artificial intelligence is one of the most interesting uses of these technologies (AI). There is potential to develop AI-powered smart contracts by fusing the data-intensive processing of AI with the decentralized security and immutability of blockchain technology. Applications for smart contracts will need to develop into increasingly complicated systems as they are used by more and more sectors of the economy.

While simple smart contract use cases may be created manually, AI-enabled smart contracts may make it possible to create far more complicated, responsive, enterprise-grade smart contracts and dApps, which might greatly increase the technology's potential.

Real Estate

By fusing blockchain and real estate transactions, smart contracts are increasing fractional ownership of assets and decreasing the entry barrier for investing for many. Particularly, there have been a number of successful attempts to tokenize real estate assets, particularly through real estate-focused blockchain platforms like RealT and SolidBlock. By adding blockchain into real estate deals, smart contract technology may also remodel the paperwork and transaction procedures. When a piece of property is tokenized, much of the required record-keeping can take place via associated smart contracts, which can save the parties time and money

Supply Chain Management

A fantastic use case for blockchain smart contracts is supply chain management. The supply chain may be significantly enhanced by the use of smart contracts. It may be used, for instance, to track things in the supply chain completely transparently. A company may employ supply networks that are enabled by smart contracts to track its inventory more precisely. Additionally, it enhances corporate operations in other areas that are directly related to the supply chain. Additionally, adopting smart contracts leads to less verification work, improved traceability, and fewer frauds and thefts. However, in order for it to be functional, the institutions must upgrade their supply chain with new hardware equipments.

Smart contracts and dApps are poised to continue revolutionizing the world of digital agreements. Numerous more businesses will benefit greatly from smart contract technology in the future. Researchers and developers are increasingly keen to take use of smart contract technology to meet the demands of the expanding Internet of Things (IoT). While IoT devices are currently given security and transparency by blockchain technology in general, the benefits of smart contracts might make this integration much more seamless.