Everything You Need To Know About Smarts Contracts – Benefits, Applications, And Challenges

Smart contracts are contracts between parties that are executed by programming codes. These programming codes are stored on a blockchain and can be triggered when the pre-set conditions or terms of contracts are fulfilled.

A simpler way to explain this is to say that smart contracts are contracts that get completed by automation with the help of codes. The execution of these codes happens as soon as the pre-set terms of contracts are met. Thus, there is no need for a third party to execute a smart contract, as the contract workflow can be automated and stored in a blockchain, waiting for a trigger to call its execution.

For example, smart contracts can be used to process royalty payments for independent creators without the need for intermediaries to decide how much royalty a creator should be paid. It can also be used to streamline and strengthen B2C relationships in real-time and KYC processes or other verifications.

Since the code of a smart contract is stored on a blockchain-based platform, it benefits from the advantages of a blockchain. As such, it gets the security, immutability, and permanence characteristics that blockchain technology offers.

What Are The Benefits Of Using Smart Contracts?

Listed below are the core benefits of using smart contracts:

How Smart Contracts Are Different From Traditional Contracts?

The primary purpose of a smart contract and a traditional contract is the same. It is to execute an agreement, in part or in full, between two parties. However, the two carry out this function in a different way.

A smart contract is a self-executing contract and can be automated by storing a program code on blockchain technology. Whereas, a traditional contract is normally laid out in written form on a document and needs a third party, such as a lawyer, to execute it.

In the below table, we have listed the basic difference between smart contracts and traditional contracts:

Origin of Smart Contracts

The term “smart contracts” was coined about 25 years ago by Nick Szabo. He is a cryptographer and computer scientist by profession who predicted the possible use of smart contracts long before blockchain technology was created.

According to Szabo, smart contracts are called “smart” because they excel in their functionality as compared to paper-based traditional contracts. In his paper, he described smart contracts as a “set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

Szabo gave the example of a vending machine while explaining smart contracts. According to him, smart contracts are designed to work like a vending machine. Don’t forget that the vending machine also helps to complete a contract between two parties without any intermediary. For instance, when a customer pays the money to purchase a snack, the vending machine releases the snack to “honour the terms of the unwritten agreement.”

How Do Smart Contracts Operate?

Smart contracts are computer codes that are stored in blockchain technology, waiting to be executed as soon as the conditions of the contract are fulfilled. These codes can be written in programming languages such as Web Assembly and Solidity.

Since every code of the smart contract is stored on the blockchain, it is accessible to the public. Thus, anyone who is interested can see and read the code. The main working model of smart contracts is based on simple conditions – “if….then” and “when…then” that are written into the code. This essentially means that if a certain condition is satisfied, then the contract will get executed.

For instance, let us say that if a person buys cryptocurrency, then he gets a discount coupon for his next payment. So, now when someone initiates a transaction to purchase crypto, the smart contracts will receive the funds, which will trigger its code to get executed by all the nodes of the blockchain network, and they reach a consensus on the outcome. The outcome is to send the user the discount coupon that could be used for the next purchase.

Once the transaction is completed, it cannot be reversed, and the ledger in the blockchain will get updated with the recent activity of the smart contract. Thus, every activity of a smart contract is traceable since everything is chronologically recorded in the nodes.

This is also why smart contracts are immutable. Meaning once the code is deployed, it cannot be altered or changed, and the transaction will get completed whenever the pre-set conditions are met. There are, however, exceptions to this rule.

Challenges Faced By Smart Contracts

Smart contracts have proven to be the best technique to solve some inherent gaps that are too complex when handled manually. However, at the same time, we must acknowledge the fact that smart contracts also have their limitations.

Here are some of the challenges faced by smart contracts:

• Immutability: Since smart contracts are stored on a blockchain, they are immutable. This means that they cannot be easily modified or changed if the need arises. It can cause a lot of problems to correct if some genuine mistakes crop up in the code. This can also be considered as an advantage.
• Scalability: As the adoption of smart contracts continues to grow, scalability becomes a major concern. Smart contracts face this issue due to the limited throughput and high transaction costs of blockchain networks. As the number of transactions grows, this limitation becomes more obvious, thereby hindering the efficiency of smart contracts.
• Security: Smart contracts may be secure but not without some threats. If a smart contract code is poorly written or not maintained properly, then the network may get prone to attacks or other manipulations, thus causing great complications to the entire contract.
• Sustainability: It is not a secret that blockchain technologies are not sustainable. They have a huge carbon footprint because they use more computational resources. Thus, the use of smart contracts attracts a huge environmental cost. That said, you might be pleased to know that there are some eco-friendly cryptocurrencies with fewer computational resources.

But, before delving into any of these assets, we recommend that you read our guide on how to buy cryptocurrency safely in 2024.

Blockchain Platforms That Support Smart Contracts

Despite the inherent challenges of smart contracts, many blockchain technologies support smart contracts. Some of them are:

Applications Of Smart Contracts

The application of smart contracts is not limited to the crypto world alone. In recent years, several industries have adopted the technology as a potent tool for enhanced authentication and sharing of records. In this session, we present some of the areas in which smart contracts are being applied:

Banking

Smart contracts are already changing the landscape of the banking sector. From processing peer-to-peer transactions, and managing KYC processes, to executing error-free insurance claims, smart contracts are behind everything.

Healthcare

Smart contracts will also find immense opportunities in the healthcare sector. From processing bills to verifying insurance claims to keeping crucial patient records, everything can be done more efficiently by deploying codes in smart contracts.

Transfer Of Ownership

Be it real estate or vehicles, with smart contracts, transfer of ownership can be done without the need for a middleman. This will make the process cost and time effective. Smart contracts can also keep tabs on any upcoming maintenance or insurance payment and can send reminders to the owners to get it done. This method is currently most prominent in transferring the ownership of NFTs. Check out our guide to discover how you can buy NFTs safely.

Publishing Industry

The publishing industry can record the ownership and rights of a book in a blockchain network. Then a smart contract can be used to calculate and pay royalties which will automatically get credited to the owner whenever the book is sold.

Smart contracts can also be used to keep track of copyright ownership and thus settle any related disputes more quickly and efficiently without the need for a lawyer.

Conclusion

The development of smart contracts is remarkable. With its automation technology and efficiency, it can help resolve many challenges that industries face today. Smart contracts can help businesses focus on their main operations by taking care of mundane tasks with the help of computational code. We will see its true potential as more and more industries adapt to blockchain-based smart contracts.

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