Blockchain technology is a revolutionary way in which digital information can be distributed and not copied, essentially creating the foundations for a new type of internet.
Despite the fact that Blockchain technologies have issues – they are still faster, cheaper, and more secure when compared to traditional systems, making them a preferred option for both banks and governments. In fact, this technology can also be used for the creation of smart contracts, also referred to as self-executing contracts, digital contracts, or Blockchain contracts.
Understanding Smart Contracts
Contracts created using Blockchain technology can be converted to computer code, stored, and replicated on a system. In turn, these contracts can then be controlled by the network of computers that run the Blockchain. This makes it easier to exchange assets such as money, property, shares, and anything else that has value – all while avoiding the costly services of middlemen.
In traditional contracts, you would need to go through a middleman such as a lawyer or notary to get the necessary documents, incurring additional fees. With smart contracts, you can pay using cryptocurrencies and avoid this middleman altogether. In addition, smart contracts define the rules and penalties one would find in traditional contracts, but these digital contracts also automatically enforce these obligations.
Don’t let the name confuse you
One of the greatest misconceptions about smart contracts is in the name itself. The term ‘contract’ is a bit misleading, since it is not really a contract in the standard sense that it is anything to be complied with or upheld.
Traditional contracts are legally binding and have considerable repercussions if not adhered to. If one of the signatory parties does not keep to their end of the bargain, the other party can turn to the legal system to hold them accountable. On the other hand, smart contracts do not need to be upheld by anyone, as they are simply sets of instructions that self-execute. All that these smart contracts do is undertake transactions to other contracts connected in the Blockchain.
With smart contracts, the individual does not need to create a new Blockchain from scratch, as the rules that define the functionality of one Blockchain can be replicated to essentially create many Blockchains on the same Blockchain.
Follow the smart contract’s code
Everyone has signed some form of agreement or contract at some point in their lives. There are several factors that determine whether or not the contents of these documents is trustworthy, and it generally starts off with the structure of what is written. Contracts use legal jargon (legalese) to set out the terms and conditions of the agreement, which is what each signatory is binding themselves to. Furthermore, a contract needs to also make sense in the constraints of the national body of existing law in the country where the contract is being signed.
When analysing smart contracts to see how trustworthy they are, there are two main elements to take notice of – the code and its interpretation, and the immutability of the Blockchain. Smart contracts are generally written in computer code and therefore interpreted by computers, which are the terms and conditions. If you feel that you can trust the Blockchain to which the smart contract forms part of, then there is a high guarantee that the code will execute exactly as it is programmed, meaning that there will be no breach of the existing agreement written in the code.
Applications of Smart Contracts
As already indicated above, Blockchain technology was firstly intended for the use of cryptocurrencies such as Bitcoin, but many people saw its potential for other applications that can also make use of the same underlying technology. As per the original Bitcoin documents, other agreements came to mind, which could specify the ownership of different types of assets and establish rules for how such agreements could be updated.
In fact, smart contracts have now been successfully applied in a multitude of industries, ranging from government, to automobile, real estate, and even healthcare. More practical applications include that of digital identities of companies, tangible assets such as property, precious metals and oil, and financial instruments such as bonds, shares, and loans.
Even though smart contracts are still in their early days, they are becoming increasingly popular across the globe. There is really no telling of what the future has in store – if smart contracts will replace traditional paper contracts altogether, or if they might become a tandem mixture of both. What is certain is that smart contracts are here to stay, so every company should at least familiarize itself with them in order to stay ahead of the competition.