A smart contract translates an agreement into computer code that runs on a blockchain. This code keeps track of various terms of agreement(s) and automates fulfillment based on conditions and/or attributes. Smart contracts provide the parties involved with an immutable exchange of money, property, shares, or anything else of value that can be verified anonymously.
Characteristics of Smart Contracts
Smart contracts have the following characteristics:
- they’re self-verifying due to automated protocols;
- they’re self-enforcing when the rules are met at all stages;
- they’re tamper-proof, as no one can change what’s been programmed.
Capabilities of Smart Contracts
Smart contracts can:
- automate processes done manually;
- ensure security;
- reduce relation to trusted intermediaries;
- support multi-signature accounts to distribute funds as soon as all parties involved confirm the agreement;
- manage users’ agreements;
- provide utility to other contracts (similar to how a software library works);
- store information about an app (domain registration information, membership records, etc.).
How do Smart Contracts Work?
A smart contract is a program that runs within a blockchain. It contains a set of rules that constitute an agreement made between two or more parties. When these rules are met, the digital contract executes the transaction. It’s like a regular application that implements some business rules, only it uses a blockchain as a database.
The anatomy of a smart contract
Once the program starts running, nobody can modify it. This is another advantage. People can examine the source code to understand what exactly the program does and can know that this code cannot be modified by hackers or viruses because smart contracts rely on blockchain cryptography.
Smart contract advantages
Here are some of the major benefits that smart contracts can bring to your business.
- Direct business relationships. Digital contracts remove the necessity of a third party to perform any dealings between two entities who want to exchange money, property, shares, or anything else of value. Parties commit themselves to the rules of the digital contract that are placed within lines of code.
- Integrity. The network will still work as predetermined even if someone leaves it.
- Trustworthiness. The terms and conditions of smart contracts are visible and accessible to trusted parties. There’s no way to dispute the conditions of a contract once it’s been established. The parties can fully rely on the smart contract.
- Speed. Smart contracts use code and live on the internet. They execute transactions quickly. This saves time for many business processes and eliminates the need to process documents manually.
- Security. Smart contracts use the same level of security as a cryptocurrency. As of today, they’re the safest way to store data on the web.
- Keeping records. All contracts are stored in chronological order and can be easily accessed when necessary.
- Paper-free. Contracts that are signed on paper can be lost, stolen, or destroyed, whereas smart contracts exist in lines of code in digital space.
Use cases of smart contracts
Businesses want to simplify their processes and speed up existing workflows. They can leverage digital contracts to do this. Here are fields that can benefit from smart contracts.
Smart Contracts for Governance
Governance agencies can execute deals with the help of smart contracts, supporting justice and democracy. For example, if a government included smart contracts in the voting process, there would be no possibility to falsify an election.
In this case, votes would be placed in a distributed register and decoding them would require exceptional computing capabilities. There are currently no computers that could manage, so it’s impossible to hack this system.
Tennessee has joined a number of other states in expanding the legality of blockchain technologies. The Tennessee General Assembly enacted a law that recognizes blockchain signatures and smart contracts as legally binding.
Smart Contracts for Supply Chains
Smart contracts can be of use in the supply chain. They can reduce the risk of theft or fraud and can allow entities to track inventory and finance supply chains. Checklists, management reports, invoices, and releases can all be automated through smart contracts using the blockchain. Smart contracts can also be used to manage approvals and automatically execute deals when all signatures are collected. Smart contracts can be used regardless of the type of marketplace or the things being sold.
Smart Contracts for Real Estate
The real estate industry can use smart contracts to sign deals between parties who are interested in buying, selling, or renting real estate.
Smart Contracts for Legal Issues
Smart contracts can pave their way in the legal field where certifying documents is required. They can reduce the need for notarization and offer a cost-efficient solution that’s also unbiased.
Why should you trust smart contracts?
Smart contracts work within blockchains therefore they are immutable and distributional just like the blockchain itself.
Immutability means that a digital contract can’t be changed, tampered with, or broken.
Distribution means that a contract is to be validated by every party in the existing network. Distribution safeguards the agreement and no attacker can release funds.
Smart contracts can streamline research. For example, NASA has sponsored a research project that uses smart contract system on Ethereum to automate maneuvering of space technology to evade space debris. The project, called Resilient Networking and Computing Paradigm, is led by Dr. Jin Wei Kocis, Associate Professor of the Department of Electronic and Computer Engineering at the University of Akron.
To implement the pilot project, Kocis’s team received a grant amounting to $330,000 from NASA. Within the next three years, the team is planning to develop a cognitive model using smart contracts. This model doesn’t depend on data they receive from Earth but from space. Ethereum-based smart contracts will teach space shuttles to avoid space litter.
“The Ethereum technology will be used to create a decentralized and safe network. The technology will also be used to create a calculative infrastructure to explore deep space. Additionally, we plan to study consensus protocols of blockchain to increase the stability of the infrastructure.”
– Dr. Kocis
NASA representatives think that this project can use the potential of decentralized ledgers/registers to create next-generation space networks.
The Future of Digital Contracts
As technology penetrates every sphere of our lives, so will smart signing with their capabilities to transform the way we operate. Smart contracts are able to execute transactional relationships securely and safely. They’re irreversible and ensure execution when legally binding rules are met. Industries will continue shifting to smart contract technology. The blockchain is ideally suited to transform complex legal agreements into step-by-step processes that can be captured in software.