• Jun 19, 2023

Exploring the pivotal role of smart contracts in blockchain technology

Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met.

A Smart Contract ( or cryptocontract ) is a computer program that directly and automatically controls the transfer of digital assets between the parties under certain conditions. A smart contract works in the same way as a traditional contract while also automatically enforcing the contract.

Smart contracts are programs that execute exactly as they are set up( coded, programmed ) by their creators. Just like a traditional contract is enforceable by law, smart contracts are enforceable by code.

How does smart contract work ?

A smart contract is just a digital contract with the security coding of the blockchain.

  • It has details and permissions written in code that require an exact sequence of events to take place to trigger the agreement of the terms mentioned in the smart contract.
  • It can also include the time constraints that can introduce deadlines in the contract.
  • Every smart contract has its address in the blockchain. The contract can be interacted with by using its address presuming the contract has been broadcasted on the network.

The idea behind smart contracts is pretty simple. They are executed on a basis of simple logic, IF-THEN for example :

  • IF you send object A, THEN the sum ( of money, in cryptocurrency ) will be transferred to you.
  • IF you transfer a certain amount of digital assets (cryptocurrency, for example, ether, bitcoin), THEN the A object will be transferred to you.
  • IF I finish the work, THEN the digital assets mentioned in the contract will be transferred to me.

Features of Smart Contracts

  1. Immutable
  2. Once deployed smart contract cannot be changed, it can only be removed as long as the functionality is implemented previously.
  3. Distributed
  4. Everyone on the network is guaranteed to have a copy of all the conditions of the smart contract and they cannot be changed by one of the parties. A smart contract is replicated and distributed by all the nodes connected to the network.
  5. Transparent
  6. Smart contracts are always stored on a public distributed ledger called blockchain due to which the code is visible to everyone, whether or not they are participants in the smart contract.
  7. Customizable
  8. Smart contracts have the ability for modification or we can say customization before being launched to do what the user wants it to do.
  9. Autonomy
  10. There is no third party involved. The contract is made by you and shared between the parties. No intermediaries are involved which minimizes bullying and grants full authority to the dealing parties. Also, the smart contract is maintained and executed by all the nodes on the network, thus removing all the controlling power from any one party’s hand.
  11. Deterministic
  12. Smart contracts can only perform functions for which they are designed only when the required conditions are met. The final outcome will not vary, no matter who executes the smart contract.
  13. Trustless
  14. These are not required by third parties to verify the integrity of the process or to check whether the required conditions are met.

Advantages of Smart Contracts

  • Reduce fraud
  • Fraudulent activity detection and reduction. Smart contracts are stored in the blockchain. Forcefully modifying the blockchain is very difficult as it’s computation-intensive. Also, a violation of the smart contract can be detected by the nodes in the network and such a violation attempt is marked invalid and not stored in the blockchain.
  • Cost-efficiency
  • The application of smart contracts eliminates the need for intermediaries(brokers, lawyers, notaries, witnesses, etc.) leading to reduced costs. Also eliminates paperwork leading to paper saving and money-saving.
  • Enhanced trust
  • Business agreements are automatically executed and enforced. Plus, these agreements are immutable and therefore unbreakable and undeniable.
  • Autonomy
  • There are direct dealings between parties. Smart contracts remove the need for intermediaries and allow for transparent, direct relationships with customers.
  • Recordkeeping
  • All contract transactions are stored in chronological order in the blockchain and can be accessed along with the complete audit trail. However, the parties involved can be secured cryptographically for full privacy.

Disadvantages of Smart Contracts

  • Immutable
  • They are practically immutable. Whenever there is a change that has to be incorporated into the contract, a new contract has to be made and implemented in the blockchain.
  • No regulations
  • A lack of international regulations focusing on blockchain technology(and related technology like smart contracts, mining, and use cases like cryptocurrency) makes these technologies difficult to oversee.
  • Difficult to implement
  • Smart contracts are also complicated to implement because it’s still a relatively new concept and research is still going on to understand the smart contract and its implications fully.

In conclusion , Smart contracts have the potential to revolutionize the way we conduct business by offering a more trustworthy, transparent, and efficient way of executing agreements. As blockchain technology continues to develop and mature, we can expect to see an increasing number of use cases for smart contracts, and their widespread adoption could have a transformative impact on the global economy.

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