Are you new to crypto and having trouble understanding what "Smart Contracts" mean?
This article attempts to explain it in the simplest terms possible, stay glued.
Table Of Contents
What Are Smart Contracts?
Why Smart Contracts?
Types Of Smart Contracts
What Are The Benefits Of Smart Contracts?
How Does It Work?
Use Case And Application
Limitations Of Smart Contracts
Conclusion
What are Smart Contracts?
Smart Contracts are digital agreements between the buyer and the seller.
They are automated terms executed as soon as the conditions are met and written in lines of code on the blockchain.
Smart contracts do not require a third party, unlike traditional contracts, which are very fast and reliable.
For instance, Skaflic signs a contract to send some Flic tokens to Indispensable if he places ads. Once the conditions are met, the payment will be made as agreed without any middleman because it has already been automated.
Keywords: Smart contracts, blockchain, agreements.
Why Smart Contracts?
As a result of issues like fraud, lack of trust, time constraints, and the stress of involving a third party, the need for smart contracts came into play as seen in traditional contracts.
Smart Contracts converted the traditional contracts into the digital parallel, and the lack of trust was solved because everything was made transparent and third parties were eliminated.
Types Of Smart Contracts
- Smart Legal Contracts:
This type of contract requires both parties to fulfill their responsibilities as stated in the contract.
Attracts penalties to defaulters as stated in the legal agreement.
- Decentralized Autonomous Organization:
They are blockchain communities bound with specific rules coded into the blockchain combined with governance mechanisms.
- Application Logic Contracts:
These are application-based contracts and are in sync with other blockchain contracts.
It enables communication across different devices.
What Are The Benefits Of Smart Contracts?
- Transparency:
One of the beautiful things about smart contracts is transparency.
With smart contracts, you do not have to be worried about fraud or other crimes because there's a detailed process of transactions available for access by both parties involved.
- Accuracy & Speed:
There are no mistakes or errors because of its excellent delivery.
Smart contracts are digital; hence, they execute as soon as the conditions are met and are very fast.
- Security:
Transactions recorded on the blockchain are encrypted, making them difficult to hack into. Additionally, each record is connected to the other on a distributed ledger, and to change a single record, the whole chain has to be changed, which is impossible.
- Immutability:
This is a unique feature of smart contracts and what this means is that it makes the contract impossible to tamper, alter or even reverse the codes and rules on the transactions once programmed on the blockchain.
How Does It Work?
Smart Contracts simply work by following sets of statements written into codes on the blockchain.
These codes are trackable and contain some rules that the parties involved must adhere to.
It involves an agreement between two parties, and once this is established, the contracts will be considered complete. It will be recorded and encrypted on the blockchain network.
The codes are transparent and publicized to any interested party to access them.
This smart contract is written in several programming languages, including Solidity.
Use Case And Application
Some of the applications of Smart Contract in our daily activities include:
Financial Services: Smart Contract aids in converting traditional financial services to digital platforms and assists in insurance cases and errors during transactions and payments.
Health Care: Encoded health records of patients can be stored on the blockchain with a private key. For privacy, records could only be accessed by specific people. It can also be used for health assessments, supervision, and recommendations.
Voting Processes: The use of smart contracts in voting processes will help in tracking votes and also rule out cases of miscount, multiple votes, and other forms of fraud by setting rules and conditions like; no voter can vote twice or with more than one device, and the counting of votes be done automatically without the interference of a third party. All this will be made available to the public for authentication.
DeFi Apps: Smart Contract-powered apps aim to metamorphose the banking sector by allowing the holders of crypto to perform even complex transactions without the intervention of any financial institution or government.
Creating currency, computations, minting of NFTs, and sending communications.
Limitations Of Smart Contracts
Despite the numerous benefits of smart contracts, there are some limitations.
Once the smart contract is created, it is difficult to change. Corrections can not be made.
Because of how they are designed, smart contracts can not acquire information about "real-world" events.
It relies on external data sources, and it could tamper with the agreement, which is crucial to security and decentralization.
Another limitation of smart contracts is that the platforms share a network. This limits the number of transactions processed in a second or minute. It is just one blockchain with a single, shared network.
A good smart contract is difficult to do well.
Conclusion
Smart contracts are digital contracts that are self-executing and apply immediately as long as the parties involved meet the terms and rules of the contracts without any intermediaries. Apart from the fact that it is reliable and efficient, it also has high-end security and speed. It is traceable and open to either party to access. Smart Contracts have proven to be of great advantage and have the potential to do even better in the future.