Smart contracts are just one of the many pieces of technology that the blockchain has brought. As the name implies, smart contracts are an improvement upon the contracts we use in daily dealings for a range of purposes. The “smart” portion of the name is used just as it would be with a “smartphone” or “smart TV,” indicating connectivity and advanced technology.
To put it simply, smart contracts can be used in situations when you would use a traditional contract, but without worries about a middleman. With a normal contract, you would have to visit a notary or lawyer and have them create a contract for you. This process takes time and costs money for both parties involved in the contract. By contrast, a smart contract takes out this middleman.
Smart contracts specifically lay out everything that a traditional contract would. This includes the parameters of the agreement as well as any penalties. In addition to removing the middleman from the equation, smart contracts are also able to automatically enforce the agreement. This is another area where both time and money are saved.
By their nature, smart contracts are self-executing, self-verifying, and tamper-resistant. They can improve security, reduce transaction costs, automate legal obligations, and reduce reliance on middlemen.
When you use a smart contract, you set up a set of parameters for an agreement. If you were the one paying for a service, you would then deposit the appropriate currency or asset into the program. This is then held in an escrow. When the requirements of the contract are met and proven to the program, the asset or currency is automatically released to the seller. The smart contract can also determine that the conditions were not met. In this case, you would have the asset returned to you. Most smart contracts operate on if-then logic.
For added security, blockchain’s decentralized ledger records the document and replicates it. This ensures immutability.
Many of the benefits related to smart contracts come directly from their ability to eliminate the middleman. Instead of having to visit a lawyer or notary, you and the other party in the contract can take care of everything yourself. The smart contract is in charge of enforcement.
The lack of a middleman will save you time and money since there is no need to wait for the lawyer or notary to have time to work on your project and spend days or even weeks drafting your contract. You will also save money since lawyers and notaries are notorious for charging high fees.
To add to this, there is less of a risk of manipulation from a third party, such as the middleman. You do not have to trust a third party, like the lawyer, to execute the contract faithfully. The smart contract does so and is definitely unbiased, something which cannot always be said of notaries or lawyers.
The lack of time spent on a lawyer or notary is not the only way that a smart contract will save you time. Most contracts traditionally require pages and pages of documents, most of which must be processed or at least reviewed manually. By contrast, smart contracts make use of coding as a way to automate certain tasks, reducing the time spent by at least hours.
The automated nature of smart contracts also saves you the time that you could potentially waste if you fill out a form improperly. Human error is much less likely with automation. This is particularly important when dealing with the number of documents typically associated with contracts.
Additionally, smart contracts are able to provide users with trust, safety, and reliability. The trust comes from the fact that the documents are on a shared ledger that is encrypted. It is impossible for someone to claim to lose a copy of the contract to get out of a commitment. It is similarly impossible for them to argue the contract terms were how you remember or even change them. The immutable ledger will display the smart contract exactly as it was originally and do so forever.
As a bonus, this immutability of the ledger means that you do not have to worry about losing the smart contract. There is no risk of losing the documents as there would be with a traditional document. On the blockchain, the smart contract documents are duplicated numerous times.
Smart contracts also excel in terms of safety as they make use of cryptography for website encryption. It is practically impossible to crack the code behind the cryptographic methods used to gain access to the information.
Smart contracts can be useful in a vast range of situations. Some examples include insurance premiums, financial derivatives, breach contracts, and credit enforcement. You can also use them for legal processes, crowdfunding agreements, property law, and anything else requiring a contract.
Although smart contracts have only begun receiving attention in recent years, the idea is not new. Cryptographer and computer scientist Nick Szabo first described them in 1996. Over the years, he revised his concept, releasing multiple publications outlining the idea. Implementation finally became possible with the arrival of Bitcoin in 2009.
Smart contracts outline an agreement on the blockchain as well as enforce them. As such, they can eliminate middlemen from contracts, saving time and money while improving security. Smart contracts have dozens of applications from business to finance to any type of agreement.