Pre-fixing ‘smart’ can only make us immediately think of phones, irrespective of the IBM Simon or the iPhone. However, for a blockchain enthusiast and for people interested in cryptography in general, the first term that comes to their mind when they hear ‘smart’ is smart contracts.
We talk a lot about the blockchain is a digital, immutable, and secure leisure – and ‘immutable’ remains one of the key features of the blockchain. This aspect of immutability is guaranteed by the presence of smart contracts. Smart contracts are an innate and inevitable feature of every blockchain right from the bitcoin blockchain to some of the most complicated blockchains like the HyperLedger Fabric.
Let us demystify smart contracts for you.
What Are Smart Contracts?
Before we address what smart contracts are, it is important to know that the term ‘smart contract’ precedes blockchain Technology at least by a decade and a half. Although the induction into the Hall of fame for smart contracts was heavily contingent upon the growth of blockchain technology, it has been existence as a concept ever since 1995. A computer scientist by the name Nick Szabo talks about self-executing programs that are extremely relevant in a distributed ledger – bearing an uncanny resemblance to what the blockchain technology is all about today!
Smart contracts are, in essence, self-executing snippets of programs that are designed to get conditionally executed and are essentially immutable.
This means that once the conditions of the smart contract are laid out, it is almost impossible to tamper with the functionality of the contract, making it one of the most secure and dependable options for executing conditional transactions. This nature of smart contracts makes it extremely relevant in multiple fields like supply chain management, healthcare, authentication, and financial transactions.
How Does a Smart Contract Work?
A smart contract is an if – then – else statement optimized for higher security and for executing financial transactions. Let us illustrate the relevance and behavior of smart contracts with an example.
There are two parties John and Paul who would like to get into a contract agreement when it comes to renting out a property in Liverpool. John owns the property and Paul would like to rent it out.
- Typically, there will be a platform that will take care to verify the identity of the person who would like to rent out the apartment and the authenticity of the apartment being listed out for renting. They would also charge a fee for facilitating the verification and ensuring the trust. In addition, they also facilitate the payment that needs to be made by Paul to John in case of the agreement coming to fruition.
- The smart contract automates the entire process described above without the influence of any third party and without bringing in the costs involved. In addition, it also eliminates the possibilities of bias that come along with any human intervention.
- Using a smart contract, both Paul and John put some value in a designated and dedicated storage from where they will not be able to easily withdraw the money that they put. Paul puts the rental amount in the storage and John inputs the address and the code to access the apartment. Once the inputs are confirmed, John receives a notification that Paul has placed an amount, and Paul, in return, gets access to the apartment details.
- Paul can go and check out the apartment in Liverpool, and if it conforms to the details provided by John, Paul takes the apartment and John received the payment. If the details do not match, then Paul gets his money back as it was not given to John in the first place. If Paul does not even visit the apartment, a certain amount is paid to John for the effort taken and Paul gets the balance amount refunded.
- If the transaction has been executed successfully irrespective of the outcome, the details are stored in the blockchain creating a permanent and unerasable record for the transaction.
- The same logic can be used to execute transactions between parties without the involvement of an intermediary, irrespective of the complexity. Just like how every program has an algorithm, the smart contract should have the ‘mechanism’ figured out, so the entire process can be conditionally automated.
One of the most pronounced manifestations of these smart contracts is in crypto projects getting crowdfunded investments. Instead of depending on third-party facilitators, a lot of crypto projects got funded through smart contract-based investment methods like initial coin offerings (ICOs). This method has effectively replaced tools like Kickstarter and Indiegogo.
Related: Creating Your Own ERC-20 Token
The Relevance & Advantages of Smart Contracts
No new technology can keep dominating the tech and commercial space if not for market advantages. Smart contracts present a host of advantages that make it one of the best options in circumstances where trust is required to be upheld and it requires a third party to ensure the upkeep of trust in the transaction.
Smart contracts facilitate direct dealings with customers and between customers. They eliminate the need for intermediaries facilitating better transparency and as a direct consequence, better relationships with customers. The removal of intermediaries also makes the entire process cost-efficient making the transaction fees almost close to, or at times, equal to 0.
The most important attribute of a smart contract is its immutability. No one can, therefore, even contemplate circumventing the rules laid out by the smart contract period since business agreements are automatically executed and enforced, the trust is unbreakable… just like the agreement is governed by a smart contract.
There is no single person who is in complete control of the data or the money – thanks to the decentralization feature of the blockchain. This implies that even if someone leaves the network, the entire network will continue to function without any attenuation in integrity and any loss in data.
Smart contracts operate on the blockchain, and the outcome has to be validated by everyone in the network. Therefore, no single entity has the power to release funds or data. This greatly reduces the possibilities of fraud as any such attempt by any entity will easily be noticed by other participants in the network and would mark that attempt/transaction as invalid.
All the records of transactions are stored on the blockchain in perfectly chronological order, leaving a permanent record of all the transaction details. This makes it an effective tool for auditing purposes.
Developing a Smart Contract
It will be surprising to know that the bitcoin itself has a smart contract that facilitates transactions. What is written on the dollar note resides as a little program on the bitcoin blockchain!
In spite of bitcoin being a pioneer, the most prominent blockchain that is used for creating smart contracts is Ethereum. Any smart contract development services company will go by the unwritten rule that Ethereum Smart contract development is easier compared to any other blockchain.
However, it cannot be denied that there are other blockchains that facilitate different smart contract applications. Each smart contract development company specializes in specific blockchain smart contracts. However, some companies might have smart contract developers specializing in every possible blockchain.
Smart contracts in itself is an interesting business domain within the wide spectrum of the manifestations of the blockchain. If you would like to create a decentralized application or even a new cryptocurrency, you can get in touch with blockchain development companies that specialize in smart contracts. They will take care to understand your requirement and create the perfect smart contact that falls perfectly in line with your business needs.