Smart contract, also known as digital contracts, self-executing contracts, or blockchain contracts are contracts of any nature that have been converted to a digital form (computer code to be precise). So rather than a paper contract, these are digitized, hosted and executed on the Ethereum blockchain. The contract code is programmed to automatically fulfil the clauses and terms in the contract, eliminating the need for an intermediary or a middle man, saving time, money, and potential conflicts of interest.
It’s pretty much like going to a vending machine to buy a bag of chips. You put the money in, and the machine checks your money and dispenses your chips. Otherwise, it gives you the money back. A smart contract is pretty much the same, except you’ll be using a cryptocurrency, but the system is basically the same.
Let’s say you have something of value to sell or buy. The commonest way you’d go about it is by getting a middleman (or signing up on a digital platform like a food aggregator if you’re selling/buying eatables) to ensure that it happens fairly for you and the other party. But this is going to cost you money as the middleman charges a cut of the transaction. Alternatively, you can have blind faith on the buyer/seller you’re transacting with it that they’ll keep their word and do away with the middleman. This will save you money but there’s a risk. What if the other party turns out not to be trustworthy? A smart contract presents an answer to this dilemma by allowing you to set up a transaction without the need for a middleman.
You and the other party would decide the terms of the transaction (like price, delivery date, quality, penalties, service levels etc.). A smart contract would be set up and you’d both pay the funds in it. The funds will be held in escrow until the transaction is done. The system will automatically act on the terms of the contract. When the conditions of the contracts are fulfilled, the payment will be released.
Smart contracts are versatile and can be used for several different purposes and under various circumstances. These include property law, legal processes, financial derivatives, insurance premiums, and breach contracts. They can be encoded on any blockchain such as the cardano, binance smart chain and tron . However, thanks to its unlimited processing capability, it is most common to use Ethereum for a smart contract. With MetaMask, Ethereum and smart contract have come closer to mass adoption. Anyone with some ethers, a Chrome browser with MetaMask set-up and a URL can execute a smart contract. The cloud-based ethereum environment provides an easy way for a developer to deploy and test smart contract.
A smart contract can offer the most secure system for voting than what exists now making it nearly impossible to defraud. Reason being that any manipulation of votes requires massive computing resources, making it tough to falsify. Plus, since it’s all accessible online, more people would be drawn to voting from the comfort and ease of doing it from anywhere and any internet connected device.
A smart contract can also act as an effective communication and workflow management tool. Simply, because it would streamline processes by cutting through the need to wait for approvals and issues to be resolved. Its accuracy also reduces the chance of general human error.
Using a smart contract can reduce overall costs by removing the need to pay for a middleman to advertise the rental property and/or to confirm the transactions. Simply, by transacting through Ethereum or Bitcoin, the property smart contract gets encoded in the blockchain. The contract would remain there permanently and it would be impossible for someone to tamper with its clauses.
A Smart contract powered blockchain can be used to store and disseminate private health records based on secure private keys. A smart contract can also help settle insurance claims by storing and processing surgery and prescription receipts on the blockchain and automatically sending these to the insurance providers. This would provide a systematic and straightforward way of dealing with claims that can otherwise become time-consuming and loaded with paperwork.
As an instance, for cancer research, a smart contract can be used to easily share cancer data by facilitating the patient consent management process while protecting the privacy of the patients and their healthcare records at the same time. The data shared on the smart contracts can facilitate data contribution and allow easier cross-comparisons between researchers.
|It’s based on your terms and your rules. There is no need for any legal, lawyer or intermediary to be involved.||Since there is no authority or intermediary involved, it becomes ambiguous how the government can regulate it or even try to tax it.|
|Automation speeds up the process and eliminates the need to spend time and effort on manually preparing and executing contracts.||Problems can occur if the contract does not cover all scenarios (such as poor quality of goods) because the transactions are automatic and irreversible.|
|A smart contract is safe as the odds of a hacker being able to crack the encryption are minimal. Plus, it's not possible to manipulate the funds in escrow as these can only be paid out as per the terms of the smart contract. If anyone tries to change the contract, all parties are notified.||Same as any other computer program, it's prone to bugs in coding. Once the contract is in the system, it is hard to change and it will continue to function the way it has been input into the system, even with faults.|
|Decentralized nature of smart contracts renders anonymity to the parties doing the transaction.||Particularly, in the financial industry, knowing who the customer is (KYC) and their financial background is vital to detect/prevent crime such as money laundering. However, due to their decentralized nature, smart contracts remove the requirement of having customer information.|
|Smart contract Documents on the blockchain are duplicated several times, so it is almost impossible to lose them.|
|Everything is digitally signed and funds are placed in escrow.|
Overall, the concept of a Smart contract is one of the best and most exciting aspects of blockchain technology. It has the potential to revolutionize the way we perform tasks associated with transactional processes that include everything from healthcare to insurance. However, there are still some flaws in the system and smart contracts still have some issues to overcome.
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