Updated: Mar 2
Recall the last time you utilized a vending machine. Have you ever thought about the complexities behind the operation of an automated electronic system?
Depending on pre-programmed rules and instructions, you can put money in this machine and choose what you want. It will only release your order if you press a button, enter a code, and the machine checks that the order follows the machine's specified rules and instructions.
Smart contracts function similarly to vending machines. When the predefined conditions and rules are met, these contracts automatically enforce themselves, leaving both parties satisfied without the interference of an intermediary. This way, the only ones concerned would be both parties who are point-blank involved in the contract. This instance means there won't be any need for go-betweens like the involvement of a financial institution, notary, or lawyer. It will be super weird consulting with a lawyer before getting your snack(s) from a vending machine!
Now that you have a rudimentary knowledge of what smart contract is all about, let's dive into what these digital contracts or software are.
WHAT IS A SMART CONTRACT?
Smart contracts are a set of computer codes that automatically facilitate the execution of an agreement when prerequisite conditions have been met or verified and are encoded into an immutable distributed ledger - the Blockchain.
In the context of this blog, the executed agreement or actions could include:
· Allowing businesses to streamline business processing through applying business rules such as.
· Transfer of funds between two parties.
· Sending notifications.
· Even issuing a ticket.
Being encoded into the blockchain technology gives this software a decentralized feature, galvanizing the disposal of the intermediaries. This action is possible because the code automatically takes the position of an enforcer, thereby making the role of, for example, a lawyer dispensable in properly executing contracts.
With the smart contract, only the computer code can determine when a contract has been fully or partially executed, thereby espousing these protocols' smart' nature.
Like any legally binding contract, the smart contract, referred to as 'Chaincode,' replicates all the notions of a regular contract but is highly automated and effectively stored in a blockchain like cryptocurrencies.
HOW SMART CONTRACT WORKS
If you have seen the Sci-Fi movie "The Matrix," you cannot easily forget the "Oracle," who has a knowledge of everything and discloses to Neo details about the world beyond the fictional world of the matrix. Most smart contracts function like Oracle because external applications feed them with every possible data and instruction to fully utilize and adequately respond to transaction initiations.
These data and instructions follow an objectively simple and specific input parameter, the "If/when…then…" logic, espousing the initiation and execution command. In other words, if "X" happens, then execute "Y," for instance, moving an amount of cryptocurrency from party A's wallet to party B's wallet after specific parameters are satisfied.
So, how can a smart contract be created or signed using technology?
The Ethereum cryptocurrency dubbed the "Smart contract's Pen and Paper" is used in creating these algorithms. Each contract is executed on the EVM (Ethereum Virtual Machine) with this currency and is completed when payments are made using the ether cryptocurrency. The 'Gas Fee,' as it is known, limits the influx of overly complicated and a slew of smart contracts.
The 'Solidity smart contract' is an example of a smart contract that leverages the Ethereum platform.
BENEFITS OF SMART CONTRACT
INDEPENDENCE: Smart contract disintermediates transactions. This contract implies that there won't be any need to depend on third parties or intermediaries. Due to this decentralized nature of Blockchain, you wouldn't have to worry about intrusion from anybody.
TRUST: If you are familiar with Blockchain's capabilities, you are aware of the technology's trustworthiness and immutability. There is no way to modify an individual's data for personal gain because there is no involvement of a third party.
SECURITY: The CEO & Co-founder of Yousign asserts that "Smart contracts further limit IT security risks. Currently, it is easier to 'hack' a conventional human contract than it is to hack an encrypted uninterpretable code.
SPEED & EFFICIENCY: Since Blockchain monitors this contract, there is zero need for tampering or reconciling errors, thereby producing instant, secure and accurate results.
These escrow-like codes are not just limited to the finance sector. As you can imagine, they are applied in governmental activities, indemnity/insurance, healthcare, education, and even real estate.
Anyone can theoretically use smart contracts in any situation that needs the exchange of goods for services. These contracts would simplify commercial negotiations, making trading more accessible, efficient, and profitable for all parties involved.
Wouldn't it be marvelous! To live in a world where every business has a Smart contract application?