What are smart contracts?
A smart contract sets out the terms of an agreement like any other contract.
But unlike a traditional contract, its terms are executed in the form of code running on a blockchain such as Ethereum or Oasis. Smart contracts are designed as self-executing contracts, meaning they can trigger certain actions after certain predetermined conditions are met. Once the terms of the agreement have been established, the smart contract will verify their fulfillment and the assets will be distributed according to the previously established terms.
Smart contracts were first proposed in the 1990s by Nick Szabo, an American computer scientist and lawyer. He is the inventor of a virtual currency called “Bit Gold” in 1998, 10 years before the appearance of Bitcoin. Szabo defined smart contracts as computerized transaction protocols that execute the terms of a contract. He compared a smart contract to a vending machine, so you can imagine a vending machine that sells soda for 75 cents. If you put a dollar in the machine and select a shot of juice, the machine is connected and programmed to serve you the shot of juice and the remaining 25 cents.
Each computer in the network or “node” stores a copy of all smart contracts and their current state alongside all transaction data. When a smart contract receives funds from a user, its code is executed by all nodes in the network to reach a consensus on the outcome.
Smart contracts allow developers to build various decentralized applications, being used in various fields of activity, from financial instruments to logistics and gaming. Smart contracts have a wide array of possible use cases.
For insurance, smart contracts could introduce error-free processing of insurance policies that avoid the long and tedious process of verifying the terms of an insurance contract today.
Real estate faces a number of problems that could be solved by the use of smart contracts and tokenization such as entry barriers in the field, lack of transparency, intermediary fees, and more.
Smart contracts could also bring improvements in health data management. This data can be stored in a distributed ledger (DLT) so that if the patient is transferred from one hospital to another, there will be no need to fill out the many forms currently required.
Many experts believe that the fields of artificial intelligence and blockchain can mutually benefit from each other’s defining characteristics. Smart contracts can benefit from the advanced computing capabilities and adaptive systems of AI technology, while AI implementations could use smart contract technology to autonomously execute rule sets and provide a secure environment for sensitive and valuable data to exist .
This list of real-world applications of smart contracts is by no means exhaustive but it illustrates the range of industries that could benefit from them.
Smart contacts offer several benefits when properly implemented, such as allowing people around the world to transact with each other without the need for an intermediary. Also, given the fact that there is no third party involved, there is no risk of manipulation. They offer complete autonomy, and since everything runs within the blockchain, smart contracts are completely safe from data loss.
All smart contracts have certain properties in common:
A significant challenge of this type of contracts is that they are not self-aware so they will execute whatever the contract says, even if the code has errors. Then, unwanted transactions or other orders may occur and currently there is no way to undo them.
Despite some limitations, smart contracts are key to many use cases and provide us with an opportunity to simplify and automate transactions, and their potential goes beyond simply transferring assets. They can execute transactions in a wide range of areas, from legal processes to insurance premiums to crowdfunding agreements or financial derivatives. Smart contracts are here to stay, the steady increase in implementation year on year only underlines their importance in the blockchain ecosystem.