What Are Smart Contracts?
Smart contracts are self-executing contracts in which the content of the buyer and seller contract is written directly into lines of code.
Smart contracts are computerized transaction protocols that fulfill contract terms.
Using it makes transactions traceable, transparent, and irreversible.
Benefits of Smart Contracts
Accuracy, Speed, Efficiency
- When a condition is met, the contract begins to execute.
- Because smart contracts are digital and automated, there is no paperwork.
- No time is spent correcting errors that may occur when filling out documents manually.
Trust and Transparency
- It is very difficult for your information to be seen and obtained by others because there is no third party involved.
- Encrypted transaction logs are exchanged between participants.
Security
- Since the transaction records on the blockchain are encrypted, they are reliable and it is extremely difficult to infiltrate my site.
- Because the entries in a distributed ledger are linked to the entries before and after it, hackers need to be able to change the entire chain to change a single record.
Fee Savings
- Smart contracts eliminate the need for intermediaries to transact with them, time delays and fees.
How do smart contracts work?
First, the parties to the contract must determine the terms of the contract. After the contract terms are finalized, they are translated into programming code. Codes represent a set of different conditional expressions that describe possible scenarios of a future operation.
When the code is generated, it is stored on the blockchain network and replicated among the participants in the blockchain.
The code is then processed and executed by all computers on the network. If a condition of the contract is fulfilled and verified by all participants of the blockchain network, the corresponding transaction is carried out.
Examples of Smart Contracts
Let’s consider a real-life scenario using smart contracts. Company X, an insurance company, provides flight delay insurance using Ethereum smart contracts. Ozan has a flight and takes out delay insurance. Ozan is at the airport and his flight has been delayed. This insurance compensates Ozan in such a case. So how does this happen? The smart contract is connected to the database that records the flight status. The smart contract is created according to the terms and conditions.
The condition set in the insurance policy is a delay of two hours or more. Based on the codes, the smart contract holds the money of company X until this particular condition is met. The smart contract is sent to nodes in EMV (a runtime compiler for executing smart contract code) for evaluation. All nodes in the network executing the code should come to the same conclusion. This result is recorded in the distributed ledger. If the flight is delayed for more than two hours, the smart contract will execute itself and Ozan will be compensated. Smart contracts are immutable; no one can change the contract.
Uses of Smart Contracts
The use cases of smart contracts can range from simple to complex.
They can also be made for simple economic operations such as moving money from point A to point B, they can also be used for intelligent access management in the sharing economy.
The most important feature of smart contracts is that they can disrupt many industries.
There are use cases of many other industries such as banking, insurance, energy, e-government, telecommunications, etc.
Technical Use Cases
- Self-verification
- Self-powered
- Difficulty of external intervention
Legal Use Cases
- It can match legal obligations to an automated process.
- If implemented correctly, they can provide a higher degree of contract security.
Economic Use Cases
- High transparency
- Fewer agents
- Lower transaction costs