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Smart Contract: Important Things You Need to Know

by | Jul 9, 2022 | Industry

Why do we need smart contract?

We engage ourselves in all sorts of transactions every day. For a transaction to take place, there is a need to have at least two parties. And in order to make a successful transaction, trust is needed. Both parties need to trust each other in order to transact. To manage trust in society and the economy, there are centralized authorities like banks, lawyers, brokers, courts, and the government.

These institutions establish trust through contractual agreements. The institutional foundations of our society and economy are based on contractual agreements. A contract is a binding agreement between two or more parties that establish trust that everyone will fill their side of obligations. They are written as well as spoken agreement that is enforced by law.

If you are a business owner, you should know how important is a contract. A business owner has to handle a massive amount of contractual agreements between different parties. These agreements enable them to cooperate in delivering their promises. Contracts provide workers with different coverage, establish obligations between suppliers along the supply chain, an agreement between the property owner and tenant, and many more.

The global economy is powered by a massively complex set of contractual agreements that are created and enforced by centralized organizations. And societies and economies are almost completely dependent on centralized organizations to maintain and enforce contractual agreements. Centralized intermediaries handle all transactions and contract agreements because we trust them.

Think about the way a loan works, you have the bank which issues a contract that you sign. The bank gives you money and then you have to return the money within a given period with interest. Everything needs to be done as per the terms of the contract and if something happens the bank takes you to a court to face the consequences.

However, our current transaction system has some flaws. The problem is that these central intermediaries record all transactions in their databases, which can still be changed, altered, tampered or even delete.  Intermediaries’ can also be hacked, corrupt, or even failed. And every process behind the scene is carried out by people which means the transaction can be slow and prone to human errors.

A transaction process can take weeks for completion because there are arrangements, negotiation, conflict, legal work, and documentation to do as well. And while these things slow down the process, they also increase costs. Intermediaries charge you and take interest in every transaction.

Now the world is becoming more and more complex where everything is happening so fast that people are losing trust in the system. This is why a lot of companies are trying to lower uncertainty through digital trusted platforms. Hence, technology has the potential to close the trust gap.

There are many trends happening today, where a lot of people are trying to move toward decentralized platforms like cryptocurrency, decentralized financed, web 3.0, decentralized autonomous organization, and Non-Fungible Tokens. And these decentralized platforms are run on blockchain technology.

Blockchain technology is a decentralized database that records transactions across a network computer. The transaction ledger is distributed across each computer in the network. The ledger is encrypted by powerful algorithms that execute everything automatically. This infrastructure makes information immediately available to all participants within the network.

What blockchain is hoping to achieve is the decentralization of trust and automate everything. It is shifting our actual system from paper and brands to a system of cryptography enforced by math and code. And to make the system works smart contract is established. So what is a smart contract?

What is a smart contract?

Smart contracts are written codes on a blockchain that run when predetermined conditions are met. It is used to execute the terms of an agreement automatically without the involvement of any intermediary or time loss. It can also trigger other actions when conditions are met.

Smart contracts are self-executing settlements with all the terms of agreements between the party involved in the transaction. The contract has the power to execute and enforce itself autonomously and automatically based on parameters that satisfy everybody. Because it is run on the blockchain, its main value lies in reinforcing security, transparency, and digital trust.

blue ethereum logo on smart contract
Photo by Choong Deng Xiang on Unsplash

Smart contracts are digital code that changes the way contracts are enforced and how we rely on them. They work by including protocols and numerically coding promises. In addition to being secure and transparent, these digital agreements can make transactions easier and more cost-effective.

Self-executing contracts also avoid misunderstandings, falsifications, or alterations while dispensing the need for intermediaries. It enables transactions and agreements to be carried out among anonymous parties without the need for trust, central authority, legal system, government, or external enforcement mechanisms.

Smart contracts can define regular rules like traditional agreements but it is enforced automatically and cannot be deleted by default. The settlement operates automatically and is completely decentralized from any outside entity or person. These digital contracts remove the human element from an agreement which is arguably one of the largest points of failure in transactions.

How smart contract works?

A smart contract is an agreement between two parties wherein both parties agree to the terms and conditions of a transaction. Once agreed upon, it is encrypted and recorded on a blockchain network. Each node in the blockchain will update its copy when the contract is completed, thus updating the “state” of the network.

Smart contracts allow developers to take advantage of blockchain security, reliability, accessibility, and transparency while still offering sophisticated peer-to-peer functionality. It works by following simple ‘if’, ‘when’, ‘else’, and ‘then’ statements that are written into the algorithms. A network of computers executes the action when the predetermined conditions are met and verified.

Only parties who are authorized are granted permission to see the results. This allows smart contracts to securely run without essential authority. The code is transparent, immutable, and publicly verifiable by any interested party that has been granted access.

Even if a person is making complex transactions with unknown entities have to establish and agree with the terms and statements that will govern the contract and their data are represented on the blockchain. The logic in a smart contract is constantly looking for specific criteria to be met and once a criterion is met the logic fulfills the agreement or move to the next terms.

These digital contracts are designed to ensure that money transfers are made according to the terms of the contract no matter what. They require all participants to respect rules to avoid any misunderstanding. The parties agree on the terms of the transaction and write them into a ledger, where funds are automatically transferred when the item is delivered.

Benefits of smart contract

The advantages of a smart contract are speed, efficiency, and accuracy. Once the conditions are met, the agreement is executed immediately. Because it is a digital contract, there’s no paperwork to process and no time spent reconciling errors which are usually the result of manual filling.

Furthermore, removing intermediaries result in cost reduction and fast transaction. Because there is only the party involved in the transaction, and the contract is encrypted, unalterable, and shared across the participants there’s no need to question whether information has been altered for personal benefits.

The blockchain ledger is encrypted and distributed which makes them very hard to hack. If someone wants to break into the system, they will have to hack every computer in the network simultaneously. Moreover, because each record is connected to the previous one, hackers will have to alter the entire chain to change a single record.

Everything becomes more efficient and less costly with no point of failure. And you don’t even have to know or trust the person on the other side of the agreement. Smart contracts enable autonomy between members meaning that after it is launched and running, members need not be in further contact.

two businessman doing transaction with smart contract
Photo by AlphaTradeZone: pexels.com

Blockchain technology is the enabler of smart contracts, which take advantage of distributed ledger technologies and maintain a verifiable record of all activity. Because these records cannot be altered after being recorded, self-executed contracts eliminate the risk of human error

It is possible to build your own digital contract to automate a transaction. Smart contracts are software programs that contain many variables, including functions and state variables. These contracts are capable of calling other smart contracts and encoding data onto the blockchain.

Decentralized agreements could facilitate the sharing of risk. It would enable social endorsements and also help assess risk and generate a binding agreement. Ultimately, the process of risk-sharing would be streamlined which could lead to a more efficient transaction process. While improving the transaction process, digital contracts could eventually replace manual processes.

Another reason that self-executed contracts are so useful is their ability to automate business processes across enterprise boundaries. They could eliminate operational costs and free up resources by automating business processes. Additionally, the use of smart contracts could increase the processing speed of business transactions across many enterprises.

Since agreements are automatically performed by the network, they can also help businesses avoid costly third-party management. They will eliminate the need for human intervention in the process. With so many potential business benefits, digital contracts will likely become a popular addition to any business. They can make transaction processes more efficient and secure.

Blockchain-based smart contracts are ideal for storing data and ensuring its immutability. Data stored in a blockchain is virtually impossible to lose, and it also provides developers with great flexibility. Developers can store almost any type of data in the blockchain and create a wide range of transaction possibilities.

Smart contract improves transaction efficiency

A smart contract is a type of computer code that can carry out the functions and tasks set forth. It is a software program that is based on distributed ledger technology and takes advantage of blockchain technology to support automated transactions. To improve efficiency, digital contracts eliminate the need for manual intervention.

It also removes the need for costly court judgments. As a result, it can reduce the level of disputes in the business world. Many companies are dragged into legal battles with other businesses for patents, trademarks, and other intellectual property. A self-executed contract will eliminate this risk and facilitate faster transactions.

The process is automated and can help companies improve efficiency in a variety of industries. Smart contracts will replace intermediaries and the corresponding paperwork involved with traditional contracts, thus increasing the speed of transactions while minimizing risks.

Smart contracts can be used to streamline the registration of property and other assets. They can even be used to track ownership of parts in the development of a project, which is a major source of business conflict. digital contracts can also help track medicines, cold chain management, and clinical research.

These contracts act as trusted administrators, capturing all data that could be manipulated. These data include the trial protocol and subjects’ registration, as well as clinical measurements. In short, digital contracts make it much easier to avoid mistakes during agreement preparation. And, with its decentralized structure, smart contracts are less likely to be hacked.

By eliminating human error and distributing the ledger across the network, these decentralized contracts help make everything more transparent. Instead of relying on a third party to enforce the agreement, the contract will operate independently and without human intervention. In addition, self-executed contracts are designed so that the other party does not suffer a loss if terms are breached.

A smart contract fixes a lot of problems by automating business processes across organizations. Instead of executing business transactions through a central company, these contracts are executed by a decentralized collective of people all over the world. They ensure accuracy in executing agreements and can speed up processes that span many parties.

The network executes the terms and agreements automatically, removing the need for trust. This means that it removes many of the problems that plague traditional agreements. Moreover, digital contracts are decentralized, allowing anyone to join, and ensuring fair computation across enterprises.

Smart contracts also eliminate the need for intermediaries, time delays, and fees. They are executed on a dedicated virtual machine embedded in a distributed ledger. However, transacting parties must make sure that the smart contract can handle all eventualities and its design needs to be robust.

Challenges of smart contract

A smart contract is a software program that allows a business to make transactions independently. It is a secure way to transfer funds and manage transactions. However, there are still many challenges and problems with smart contracts. It is also important to remember that it will not completely eliminate human intermediaries in the business world.

There are several things to consider before deciding whether or not digital contracts are for your business. Self-executed contracts must meet various standards and protocols to be able to operate effectively. In addition, it must be compatible with the different types of agreements and scales.

These decentralized contracts will require a high degree of trust and privacy. And the problem that is particularly concerning is that trying to anticipate what will happen in the future to write the code can be very difficult. Especially agreement for long-term business and economic relationships. A lot of eventualities must be taken into account when writing terms.

Contracts are usually made to govern future actions. The future is very uncertain and many things can happen that we don’t really expect or predict. What makes things even more difficult is that code must be highly precise and specific so that the algorithm can execute the logic properly. Because the future is uncertain, writing the code can be difficult.

A smart contract is designed to perform certain actions when specified parameters are met. In general, they are written in computer code and will self-execute themselves when certain criteria are met. However, self-executed contracts should be carefully reviewed before they are deployed. Because a single error can render the whole chain biased.

The important challenge with a code-based smart contract is the risk of coding errors. While careful code review is the norm, there is still a potential for errors. These errors will be present between the software code and the primary agreement and can have disastrous financial consequences. Therefore, these contracts should be used carefully and with great caution.

Now if two parties are in a long-term business relationship, it is important that they are on the same page and understand each other. And if something unexpected happens, the parties can have some reasonable way of dealing with it that satisfies both parties. But the problem with the computer is that they are only concerned with the predetermined code written in the algorithms. And if criteria are not met they can trigger undesirable sanctions without allowing the parties to negotiate.

Another key aspect of smart contracts is their concurrency. Despite the fact that the system can handle a high number of transactions, the lock algorithm slows down transactions unless there is a conflict between two smart contracts. The overhead associated with this conflict processing prevents it from generating acceleration when the transaction flow is low, and it slows down with increased transaction flow.

Future of smart contract

The rapid development of science and technology has transformed every aspect of our lives. The rise of digital technology has improved the efficiency of work. With the development of blockchain technology, smart contracts are set to revolutionize the way we use contracts. The future of smart contracts is bright.

As more people learn about the benefits of smart contracts, their adoption will increase. With this technology, agreements can be written in computer code and stored in a distributed ledger. These agreements can be used in a variety of industries without the need for a legal system or an external enforcement mechanism.

Legal professionals will benefit as well, as they can now use smart contract templates to produce legal agreements. It can facilitate financial trade, insurance, legal processes, crowdfunding agreements, and credit authorization. For example, digital contracts can replace agents and lawyers in the public sector and even in the legal industry.

In addition, code can be easily audited and amended which attracts even more interest. Digital contracts are becoming the future of many industries, including banking, e-government, mobility, and even education. They are a key part of Web 3.0. It has the potential to revolutionize our world.

A musician can publish a smart contract for a new record. After a customer purchases the music, he sends a certain amount of cryptocurrency by the term of the contract. The contract then releases a digital key that enables the user to access the music. This transaction is recorded on the blockchain, proving that the license was purchased.

In the future, decentralized contracts will be written in natural language and reference legally binding code. This makes smart contracts highly desirable for businesses and investors. These contracts can also simplify the world when it comes to the management of edge computing devices. Similarly, a smart contract can streamline processes on Internet of Things devices.

Digital contracts can be used to facilitate voting systems. They can include voting mechanisms, add or remove members, and alter voting rules, debating periods, and majority rules. These contracts can also help facilitate voting for a decision within a decentralized autonomous organization (DAO).

By incorporating voting mechanisms, a DAO can determine whether a particular proposal is accepted or rejected. JPMorgan has started a new initiative aimed at advancing smart contract deployment in the banking sector, with its blockchain and stablecoin the JPM coin. The bank aims to reduce intermediary costs and pioneer a profitable landscape for other banks to follow.

Smart contracts are also ideal for the real estate industry. They can eliminate trust issues and make the transaction quicker and easier. A self-executing contract could be used to rent an apartment. Because agreements are created in a ledger that is publicly stored. Rather than having an agent or middleman verify a potential renter’s payment history, the contract could be used to rent or sell an apartment.

Blockchain can also be used in arbitration. Digital contracts can be used to resolve disputes over blockchain activities across international borders. For example, blockchain technology can randomly select jurors. The chosen jurors are based on the cryptocurrency stake in the smart contract. Staking is the act of offering cryptocurrency as collateral.

While a smart contract is not perfect, it does offer many benefits. It can eliminate procure-to-pay gaps, trigger required approvals when a product is delivered, and transfer funds immediately from the buyer to the seller. It could also reduce accounts payable costs and streamline finance operations. Among other things, it can prevent disputes by automatically shutting down assets connected to the internet if payment is not received.

The emerging markets will benefit much more from this technology just like a couple of decades ago emerging markets benefited from the internet and have massively shifted our lives. Smart contracts powered by blockchain are going to change the world as we know it. Anywhere where there is a monetary transaction, self-executed contracts can be the underlying executer.

The global market size of smart contracts was valued at USD 106.7 million in 2019. A CAGR of 18.1% is expected from the period 2021-2026. The market is expected to reach USD 345.4 million by 2026. The market will surpass USD 1460.3 million by 2028.

The world that we’re going towards will be greatly simplified. In short, digital contracts are the future of transactions and are revolutionizing the world as we know it. This is an exciting development for the world of finance. It will be interesting to see how smart contracts will change the way businesses do business.