What are Smart Contracts?
Smart contracts refer to agreements automated between a receiver and the creator of the contract. This contact is a written code and is built on the blockchain technology, therefore, it maintains the immutable and irreversible nature of data on the blockchain technology.
Developers use smart contracts to automatically execute agreements to make all the parties involved sure of a conclusion immediately. The use of smart contracts is so that there will be no need for intermediaries.
Developers also use smart contracts for workflow automation, the workflow will only begin when the parties involved complete all the requirements for executing the smart contracts.
What is an Executed Smart Contract?
A smart contract is only executed when the signed contracts create a mutual connection between the parties involved in the contract. Before a contract is executed, the parties are bound legally to fulfill all the requirements they all agreed upon when the agreement was written. Smart contracts have become popular through the Ethereum network. Today, smart contracts have been the foundation for Decentralized Applications (DApps).
How Does a Smart Contract Work?
The best way to view smart contracts is to see them as written statements of agreements binding more than one party. Although, in this case, these written agreements are digitally written. If the parties meet the requirements of the written contract, then the agreement is honored and the contract is considered an executed contract.
Steps for Building Smart Contracts
Below are the various steps you must follow if you want to build a smart contract.
- Write the agreement
- State the requirements
- Code the agreements and requirements
- Build the coded agreements and requirements into the blockchain
- Execute the smart contract
- Record the transaction
Who can use Smart Contracts?
Developers can program smart contracts for people to use. The contracts will take the place of retail systems and mandates set by the government. Also, people can use smart contracts to save the time and money needed in taking some disagreements to court.
Smart contracts are very secure depending on the coding properties. Ethereum Blockchain contracts developers for example write smart contract codes using Solidity Programming Language.
The programming language of Ethereum-based smart contracts makes them Turing-complete. Here is what it means; the smart contract rules are rooted in the Ethereum Network code, making manipulations by unfair players impossible.
This deep rooting into the network code will make sure that there are no scams and alterations of the contract by one of the parties.
If you will look at the concept of smart contracts technology, you will have to see the smart contracts in fragments of steps.
Primarily, there has to be an agreement based on the contract, then when the parties involved meet the conditions of the agreement, the smart contract will be executed.
An executed smart contract is a completed smart contract. The decision to meet the requirements of the contract will be stored on the blockchain network as encryption.
Immediately after the parties meet the requirements of the agreement and the contract is complete, the blockchain will record the decisions like every other transaction on the network. What follows after is an updating of nodes.
Every node will record its blockchain copy having the completed contract. This update will result in a new network state.
Can Bitcoin and Other Blockchain Networks use Smart Contracts?
To a very good extent, other blockchain networks can use the smart contract. Majorly, transactions on the Bitcoin blockchain are a simple picture of smart contracts.
The network functionality of the Bitcoin blockchain network has been expanded because of the development of layer-two solutions. An example of these solutions is the lightning network.
Having mentioned this, the case of using the Ethereum blockchain network for developing smart contracts is a special one.
Ethereum is not like other blockchain networks. While other blockchains like the Bitcoin blockchain are distributed ledgers, the Ethereum blockchain network is a distributed state machine. This machine contains an EVM (Ethereum Virtual Machine).
All the nodes in the Ethereum blockchain network agree to retain a copy of the codes for smart contracts and the set of rules guiding the execution of these contracts. Furthermore, the nodes store these codes and rules.
The limitations for all smart contracts on the Ethereum network are similar because all the nodes store the rules intertwined with the network codes.
In addition to what we have in the Ethereum Blockchain, in September 2021, there were over 200 smart contracts recorded on the Cardano Blockchain Explorer. Developers deploy smart contracts on the Cardano (ADA) blockchain using Marlowe, Glow, and Plutus programming languages.
Differences Between Smart Contracts and Written Contracts
|Written Contracts||Smart Contracts|
|Automation of Agreement||Every part of the agreement.||The automated part is the transaction|
|Recording||The parties involved write the conditions on paper.||The conditions or rules are rooted in the blockchain of the smart contract network.|
|Writing/programming Language||The contract is written in human language||Developers write the contracts in machine language|
|Internal State Modification||It is based on the interpretation of the contract agreement||The contract is immutable|
Benefits of Smart Contracts
- Blockchain technology has gained speed, accuracy, and efficiency with the introduction of smart contracts. Also, smart contracts have given blockchain technology transparency, savings, and security.
- Smart contracts have eliminated the need for intermediaries or trusted third parties making commercial processes faster and automatic.
- Smart contracts prevent people from backing out once they sign the agreement. This feature goes a long way in reducing fraud and manipulation.
- Smart contracts save money because they take out intermediaries with the fees the parties will have to pay them for their services.
- Data of executed smart contracts cannot be lost because there are duplicate copies on the blockchain network.
- The data of executed contracts are encrypted making it impossible for anyone to tamper with.
- Smart contracts take out all manual form-filling errors that may occur from both parties.
Smart contracts are a means of making sure that transactions are safe, automated, and transparent. The idea is fast changing the way people transact with one another and in a world where there are fraudulent activities, this is what we all need.
Smart contracts are beginning to be part of our everyday systems like banking, supply chain, governmental processes, and so on. With the rate of adoption, it is not going to take long for smart contracts to become part of our daily lives.