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A smart contract is a self-executing contract between two traders written directly into lines of code. It contains the terms of the agreement between the buyer and the seller. This code exists on a decentralized, immutable public ledger, enabling the secure exchange of value. Furthermore, that code controls the execution, and the transactions are irreversible, transparent, and trackable.
Smart contracts permit the transaction of valuable digital or physical assets between anonymous parties without the need of a mediator, legal system, or central authority. The contract executes when the terms and conditions of the agreement are met.
How Smart Contracts Work
The working principle of intelligent contracts involves five steps:
- Offer: The first party begins the transaction with an offer. The party writes the offer in an ”if-then” statement into code and introduces it to the blockchain.
- Negotiation: The terms and conditions of the contract are visible on the public ledger; this enables negotiation between the parties. These terms could be how to represent the data on the blockchain and a framework for resolving disputes.
- Approval: Once the parties agree on the terms and conditions, the contract becomes immutable. Some words include the strike price, due date, and expiration date, among others.
- Satisfying Conditions: Smart contracts can self-verify the conditions by interpreting the real-time data after the two parties have approved the agreement.
- Transaction: When the triggering event occurs, a network of computers executes the actions. The actions could include transferring assets, such as information, real estate, stock, intellectual property, and digital/non-digital funds.
Benefits of Smart Contracts
More sectors globally are opening up to the extensive smart contracts use because of the advantages they offer. Some of them include:
Blockchain transactions are immutable and impossible for anyone to alter once a transaction is verified. Moreover, the decentralized nature of blockchains ensures revamped security as a hacker would require high computational power to breach the network. Furthermore, you can follow the digital print as long as the blockchain exists, acting as a backup.
Speed, accuracy, and efficiency
Smart contracts act automatically as soon as both parties meet the conditions set. Depending solely on the code presented during clever contract creation ensures that the transaction is speedy.
Not only do they ensure transaction accuracy, but they also offer a transparent way around things. Lacking paperwork is an additional advantage as it eliminates human error, including miscommunication.
Straightforward Transactions at Low Costs
Smart contracts deal with the most significant issue with traditional arrangements, which is intermediaries. In turn, users have direct transactions, further lowering costs associated with intermediaries. Additionally, blockchain transactions offer low prices generally, saving you funds.
Smart contracts use cases.
Let us look at some of the use cases of smart contracts that help balance the cryptocurrency market.
Supply Chain Management
It is the management of the movement of goods and involves the active streamlining of the supply-side of a business. When the item in a supply chain network reaches its destination, it changes ownership status. IoT sensors enable participants to track the location of an object. They can also follow the item if it disappears during the process. The virtual nature of intelligent contracts automates all routine tasks and payments, avoiding the bulk of documentation.
With a compound annual growth rate of 85%, the global blockchain market in insurance is expected to reach $1.39 billion in the next two years. Smart contracts can automate claims to improve insurance processes when certain events occur. For instance:
- AXA introduced Fizzy, an insurance product that uses the technology of smart contracts to deal with flight delay insurance claims. Fizzy connects to the databases of global air traffic. An over two hours delay triggers payments automatically.
- B3i is a start-up blockchain platform that uses smart contracts to provide insurance solutions. It uses this technology to validate conditions and determine the asset as a candidate.
Marketplaces that link traders rely on smart contracts to enable transactions without a broker or an intermediary. Its scope ranges from local markets with small businesses to global markets without broker companies like eBay and Amazon. The art world, too, has specific needs that link investors and collectors. In addition, some marketplaces sell data streams through smart contracts, such as Ocean Protocol and Dataspace.
The patients’ data in the healthcare system needs to be immutable and accessible only to specific researchers. Encrypgen applies this blockchain technology to transfer the DNA data of the patient to researchers for clinical trials. The researchers then find cures for diseases or better treatment. Then, the intelligent contract combines DNA data and payment data on the blockchain. This facilitates payment, data access, and record-keeping of the parties who have access.
The blockchain and crypto gambling industry is a growing sector, especially during this global pandemic. Online casinos are gaining traction, and smart gambling is here to help. Users can leverage predictions and automated betting, while the gambling sites can improve settling debts.
Smart Contracts Coming to Bitcoin?
The premier cryptocurrency, bitcoin, will enjoy new use cases when Dfinity Foundation’s Internet Computer blockchain brings intelligent contract capabilities. The chain key cryptography of the Internet Computer will be used to integrate smart contracts to the BTC addresses.
This will give them access to transactions on the Bitcoin blockchain. Internet Computer transaction finality takes two seconds compared to the 40 minutes on the Bitcoin network. Its integration will enable access to the so-called ”Bitcoin banks” bringing about quick transactions.
Smart contracts are one of the most exciting things brought about by blockchain technology. The applications of intelligent contract concepts will revolutionize our way of life. Also, they should be around for a long time to come.
A point to note is that more platforms are embracing intelligent contracts, including Cardano, Chainlink, Binance, to mention but a few. This move is a clear indicator of the potential intelligent contracts have in reshaping different sectors globally. Time will tell how far the technology can transcend and what else it offers the global community.