A smart contract is designed to safely and transparently facilitate the exchange of assets, without the need for a middleman.
In short, smart contracts are programs that are coded to automatically control the transfer of assets between two or more parties, once predefined conditions have been met. This concept was first theorized in 1994 by Nick Szabo.
The term “smart contract” is often loosely used by crypto-enthusiasts to describe a several different concepts. The most notable of these concepts are “smart contract code” and “smart legal contracts.”
Smart Contract Code
In the early days of blockchain, the platforms that used the technology were mostly designed to do things like facilitate transactions of cryptocurrencies. Smart contract code is essentially any code within the blockchain that can control assets (cryptocurrency) within the same blockchain. In order to qualify as a smart contract, the code must execute automatically, be trackable, inalterable, and irreversible.
Smart Legal Contracts
A smart legal contract uses smart contract code to improve upon traditional legal contracts. These improvements could take the form of making agreements more stable or predictable, or to simplify complex operations.
But there is one issue with this: smart contracts are not yet entirely supported by the legislative framework of most societies. Therefore, they cannot be a one-size-fits-all solution for legal contracting until they are supported by legal entities as well.
How does a Smart Contract work?
- Assets are coded
- Contract terms are coded
- Both the terms and assets are entered as a block in the blockchain
- Once the contractual terms are met by both parties, the contract is executed
- Any assets transfers are completed based on the terms of the contract
What are the benefits of using Smart Contracts?
Smart contracts have the potential to streamline and automate a wide variety of transactions that take place in every professional sector.
They can help businesses develop trust with their clients. They can also ensure that when people enter into a deal, both parties are held fully accountable for the conditions within the contract. And what is most important, they are immutable, therefore they eliminate the risk of someone altering a contract to take advantage of others. These features could prove themselves to be very valuable, especially in sensitive industries like the financial sector or public administration.
Which industries can benefit from Smart Contracts?
- Real Estate
- Supply Chain Management
- Financial Services
- Government Institutions
Challenges in the Use of Smart Contracts
- Instilling Trust in the Use of Smart Contracts
Achieving widespread use of this technology will require accumulating the trust of the general public by ensuring that their personal rights, assets, identity, and safety will be protected with smart contracts. In this regard, the most pressing concern with smart contracts today is the necessity of bridging the gap between traditional legal contracts and smart contract code/smart legal contracts.
- The Oracle Problem
The oracle problem is an obstacle in the widespread implementation of smart contracts. It basically acknowledges that the execution of smart contracts cannot be triggered in real-time based on the occurrence of events in the physical world. To overcome this limitation, oracles must be introduced to the blockchain.
- Specific Platform Limitations
The design of the blockchain platform used to create smart contracts can be a major concern too. If the network is not scalable and built to sustain a high volume of transactions, the smart contracts being hosted on that platform will not perform optimally.
Costs associated with using that platform may rise as well, especially in the case of PoW-based platforms. Similarly, if the network does not have viable security features, the smart contracts on that platform may be compromised by cyber criminals or bugs in the network.