What are Smart Contracts?
Smart contracts are essentially digital agreements stored on a blockchain. These contracts automatically execute when specific, pre-defined conditions are met. Their primary purpose is to automate the execution of an agreement, ensuring immediate certainty of the outcome for all participants without the need for intermediaries or incurring time delays. They can also be used to automate complex workflows, triggering subsequent actions when particular conditions are satisfied.
How Smart Contracts Work
Smart contracts function by adhering to simple “if/when…then…” statements that are coded directly onto a blockchain. A network of computers then executes these actions when the pre-determined conditions are met and verified. These actions can range from the release of funds to the appropriate parties involved, to registering a vehicle, sending notifications, or issuing a ticket. After this, the blockchain is updated to reflect the completion of the transaction. A key feature of blockchain technology is that once a transaction is recorded, it cannot be altered. In addition, only those parties who have been granted permission can view the results.
Within a smart contract’s framework, there can be as many stipulations as necessary to provide assurance to the participants that the task will be completed effectively. To set up these contracts, participants must first outline how transactions and data will be represented on the blockchain. Then, they agree on the “if/when…then…” rules that will govern those transactions. Additionally, they need to explore all potential exceptions that may arise and establish a clear framework for resolving any disputes. Once these steps are complete, the smart contract can be programmed by a developer. Many organizations that use blockchain for business offer templates, web interfaces, and other online tools to simplify the construction of these smart contracts.
Benefits of Smart Contracts
Smart contracts offer significant advantages:
Speed, Efficiency, and Accuracy: The execution of a smart contract happens instantly once its conditions are met. Smart contracts eliminate paperwork and manual processes, and also prevent the errors often associated with processing documents manually.
Trust and Transparency: With no involvement from third parties, as well as secure, encrypted records of the transactions shared across all participants, there is no ambiguity about whether information has been altered for individual gain.
Security: Blockchain transaction records are encrypted, making them exceedingly difficult to hack. Furthermore, because each record is linked to the preceding and subsequent records on a distributed ledger, a hacker would have to alter the entire chain to change a single record.
Savings: Smart contracts eliminate the need for intermediaries to handle transactions and subsequently, their associated time delays and fees. This results in greater efficiency.
