When people think of a contract, they mostly think of a piece of paper with signatures. That’s a standard contract. There is a type of contract called a “smart contract.”
A smart contract is a computer protocol that helps to facilitate, verify, or enforce the negotiation or performance. Smart contracts are digital and use blockchain technology.
The following article will explain more about these contracts and provide examples of how they work.
What are These Contracts?
According to Investopedia, a smart contract is based on the terms between buyer and seller being directly written into lines of code. The code and the agreements exist across a decentralized blockchain.
The contracts allow trusted transactions to be carried out among disparate, anonymous parties without needing a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible.
These contracts were proposed by Nick Szabo, a legal scholar, in 1994. He developed the concept due to a security breach that occurred on the DigiCash payment system in the early 1990s.
How Do These Contracts Work?
Here are the steps typically involved in the transaction of such contracts:
A buyer and seller agree to the contract terms using a programming language. The code is written into lines of code and exists across a decentralized blockchain network.
The buyer sends the agreed-upon amount of cryptocurrency to the seller’s contract address. The seller confirms that the funds have been received and then releases the product or service to the buyer.
The buyer confirms they have received the agreed-upon product or service and then approves the transaction. The seller can withdraw the funds from their contract address at any time.
Top Parts and Features of Such Contracts
Smart contracts have the following features:
1) Self-executing
These contracts are created and agreed to by two parties. The agreement is written into lines of code and stored in a blockchain. This contract will self-execute when certain predetermined conditions are met.
For example, you may want to sell a car. You agree to the terms and conditions that stipulate that the car will be delivered to them when the buyer pays the agreed-upon price.
2) Dispute resolution
These contracts are a transparent and traceable way to conduct transactions. All actions taken within the contract are recorded on the blockchain. Such contracts can help resolve disputes if one party tries to get out of the agreement.
For example, if you are buying a car, you may have the seller add a clause that stipulates if the seller does not deliver the agreed-upon vehicle at the agreed-upon time, the buyer will get a full refund. It would help to resolve any disputes that may occur.
Furthermore, these contracts are becoming more and more popular. As more people become familiar with them, they will likely be used in a broader range of transactions.
3) Decentralized
These contracts are executed on a decentralized network. The code for the contract is shared across a network of computers. It means there is no centralized authority controlling the contract.
For example, if you are buying a car from someone and there is no central authority overseeing the contract, it reduces the risk of fraud and eliminates any delays that may result from a third party.
The Benefits and Advantages of these Contracts
There are several benefits and advantages of such contracts:
1) Transparency
These contracts are traceable and transparent. The code for the contract is on a public blockchain, which means everyone can see it. No one can alter the code without the consensus of the network.
2) Security
Since such a contract is on a public blockchain, it is secure. The code cannot be altered without the consensus of the network. It eliminates the risk of fraud. A smart or blockchain contract is also immutable, meaning it cannot be changed after being executed.
3) Efficiency
These contracts are efficient because they automate transactions. There is no need for a third party to oversee the contract or mediate the transaction. Third parties can be expensive and slow down the transaction process.
4) Reduced Costs
Smart or blockchain contracts can reduce costs and help you save money. There is no need to pay a third party to facilitate the transaction, and all transactions are completed within minutes.
Applications for these Contracts
These contracts have a variety of applications. Some of the most popular applications include:
– Supply chain management
– Real estate
– Car sales
– Insurance
– Payments
The Bottom Line
Smart contracts are a secure and efficient way to conduct transactions. They offer several benefits and advantages over traditional contracts. As more people become familiar with them, they will likely be used in a broader range of transactions.
