Beginner’s Guide to Smart Contracts: Blockchains, Data and Legal Matters
The invention of cryptocurrencies and blockchain technology promised to bring a lot of changes in the world's financial market. At first, cryptos were only used for trading, with the idea of someday reaching mainstream usage. This would allow any coin holder to pay for any goods or services, as well as to trade, and make a profit.
After several years, however, the focus started to shift from the use of blockchain technology as nothing but an underlying technology for Bitcoin and other cryptos. The invention of Ethereum was particularly important, as it shifted the focus from the cryptocurrency to the blockchain technology itself, coming up with several new use cases.
It was not long before developers realized that blockchain has a lot more potential than just allowing crypto transactions, and countless new potential use cases were discovered since then. Among them, there was the creation of smart contracts — pieces of code that include contractual clauses that would self-execute and self-enforce.
About Smart Contracts
Smart contracts depend on blockchain technology, and they serve as one of the blockchain's most successful use cases so far. They can be used for a variety of use cases, although they are currently mostly created for facilitating transactions. Like any other information stored on the blockchain, smart contracts cannot be changed, forged, or manipulated in any way. They are a guarantee that the terms of the deal will not change, which makes them especially attractive to those who like to avoid taking risks whenever possible.
This technology received a lot of attention rather quickly, and many of today's crypto and blockchain projects have implemented it, with Ethereum being the best-known one among them.
One of the biggest differences between smart contracts and traditional contracts is that smart contracts can execute themselves. In other words, the contract is enforced automatically when certain, previously-established conditions are met.
Smart Contracts' Pros and Cons
Despite the fact that blockchain has been around for a full decade already, the technology still has flaws that need fixing. Even smart contracts themselves have positives and negatives attached to them, although the list of pros outmatches the list of cons.
– Data accuracy — Traditional contracts leave a lot of room for mistakes. In fact, human error is one of the largest problems today in pretty much every industry. With smart contracts, on the other hand, the details of the contract can be established, and there is no room for mistakes and risks.
– Improved communication — Smart contracts allow users to set up the terms of the agreement with accuracy and a lot of details. As a result, the communication between participants is clear, and all parties understand every aspect of the agreement.
– Transparency — when it comes to smart contracts, there are no hidden details or changes that can be made once the contract is activated. It is impossible to forge them, manipulate information, or scam the other party in any way. Smart contracts are completely transparent.
– Improved speed — After decades of improving internet speed, all codes running online are lightning-fast. The same goes for smart contracts, which are essentially still just pieces of code. Using a smart contract instead of a traditional one can save hours, if not days, as they are instantly accessible to parties involved, wherever they may be.
– The more efficient, paper-free process — As mentioned, smart contracts are precise, fast, and very efficient, especially due to the fact that they do not require a physical copy. As a result, they are faster to process, while they remain immutable, environment-friendly, and secure.
– Top security — Smart contracts are protected by more than blockchain's ability to store information and prevent manipulation. In addition, they also use the best encryption that is currently available, which makes them the safest and most reliable thing on the internet.
Of course, smart contracts do have a few downsides, as they are still a relatively new technology that has yet to be completely perfect.
– Being the new technology — While those closely familiar with what smart contracts are and how they work usually tend to praise them, the fact is that this is still new and unfamiliar technology to most users. As such, it unclear to them, and users are usually afraid of it.
– Records are irreversible — One of the greatest advantages of smart contracts is also their greatest weakness. The contract can be changed after being established if the involved parties agree to change the conditions. However, it is very difficult to do so, and it can lead to mistakes and further risks.
– Errors are still possible — We have already established that the use of codes reduces the risk of a human error. However, there is still possible to make a mistake during coding, as the code must be written by people.
– Third-parties must change their roles — Smart contracts do not depend on third parties the way traditional contracts do, but they still need them to an extent. For example, those who want to create a smart contract sometimes need an IT-savvy lawyer, who should be consulted, even by programmers.
How can Smart Contracts Actually be Used?
Smart contracts can already be used in a number of ways. One use case concerns insurance, as companies can automate their policies through the use of smart contracts.
Another good application is for registering ownership of content, as well as transferring rights. Then, there are IoT devices which can store data through smart contracts. This can improve delivery tracking, record possession, and alike.
Smart contracts can also revolutionize banking, as we have already established their usefulness regarding faster, more transparent, and cheaper transactions. These are only some examples of how smart contracts can be used, but their reach extends far beyond these few use cases. They can also be applied in e-government, art, telecommunication, education, energy, and numerous other sectors.
The most popular smart contracts are those made on the Ethereum network. While Bitcoin's network remain's simply a transaction mechanism, Ethereum was designed to be a platform where smart contracts and dApps can be created, as well as other products, such as new tokens.
Ethereum's platform is most commonly used for smart contracts, and it used Solidity for creating them. It also uses its native ETH cryptocurrency.
From everything we have seen, it is clear that smart contracts hold a lot of potential for the future of finances, but also for revolutionizing the way contracts are being made in other sectors. We have also seen that they have their own pros and cons, and while a number of issues have yet to be resolved, it is important to remember that this technology is still in its early stages. In time, the tech will be polished, and smart contracts will have the opportunity to change nearly every aspect of business world.