A smart contract is a program that uses blockchain technology to automate the execution of an agreement between two parties. Smart contracts were created to offer a faster, safer and more transparent way of processing transactions, eliminating the need for a trusted third party to verify agreements and payments.
How do smart contracts work?
Smart contracts are computer programs written in a specific programming language and executed on a blockchain. A blockchain is a distributed database spread across several computers around the world. Each computer stores an identical copy of the blockchain, and every transaction is recorded on all the computers, ensuring that all parties have an exact copy of the transactions, and that the data is secure and transparent.
When a transaction is carried out via a smart contract, the conditions are specified in its computer code. Once the contract is active and the predefined conditions have been met, the smart contract executes automatically. They are generally triggered by a user’s transaction.
The blockchain verifies that all conditions are met before executing the smart contract. Automatic execution of the smart contract eliminates the need for a trusted third party, such as a notary, to verify and validate the exchange. But make no mistake: a smart-contract is not yet a contract, and has no legal value.
What are the advantages of smart contracts?
Smart contracts offer a number of advantages over traditional transaction processing methods. Firstly, smart contracts are faster, as they execute automatically as soon as conditions are met, without the need for time-consuming third-party verification. What’s more, smart contracts are more secure, as transactions are securely and immutably recorded on the blockchain, reducing the risk of fraud and forgery. Finally, smart contracts are more transparent, as all transactions are recorded on the blockchain, giving all parties complete visibility of the transactions carried out.
What are the applications of smart contracts?
Smart contracts are a versatile tool that can be used in a wide variety of fields. In finance, smart contracts can be used to automate payment processes. For example, smart contracts can be used to make automatic payments for loans, dividends, interest and other financial transactions.
In the field of logistics, smart contracts can be used to track the status of shipments. Smart contracts can be used to record the details of each stage of a shipment, from dispatch to final delivery, enabling accurate and efficient traceability.
In the insurance sector, smart contracts can be used to manage insurance contracts. Smart contracts can be used to automate underwriting, claims management and compensation payment processes.
In the real estate sector, smart contracts can be used to manage property titles. Smart contracts can be used to record property details, such as title deeds, rental agreements, real estate transactions and more.
In addition, smart contracts can be used to automate governance processes. Smart contracts can be used to organize electronic voting or to manage collective decisions. Smart contracts enable transparent, efficient and secure management of governance processes, while eliminating the need for a trusted third party.
What are the limits of smart contracts?
First of all, smart contracts are limited by the conditions previously defined in the computer code. Although smart contracts can be configured to automatically execute certain actions when conditions are met, they may not be able to take into account all unforeseen or exceptional situations. For example, if a car insurance contract provides for compensation in the event of a collision, the smart contract may not be able to take into account all the details of the situation, such as the severity of the collision, the presence of alcohol or drugs in the driver’s bloodstream, and so on. Moreover, smart contracts do not yet have any legal force.
It’s usually via oracles that smart contracts retrieve real-life information. In this case, the risks are the same as those associated with oracles.
Smart contracts can be expensive to set up. Writing and testing a smart contract may require the expertise of a specialist developer. What’s more, errors in the computer code can lead to significant financial losses.
