Contracts. We use them all the time in everyday life. Whether it’s for buying a house, securing payment or even getting married; contracts are necessary to outline the process and obligations involved in an agreement. They have worked for decades to ensure that what is supposed to be done in any circumstance will be executed as planned.
Conventional contracts and smart contracts essentially do the same thing. They detail a process and explain the rules that come with it. They also explain what happens when these rules are followed or not. The main difference is that conventional contracts must have a centralized third party verify the contract whereas a smart contract uses computer software that implements these detailed guidelines by itself. It does this based on the lines of computer code written for it.
This articles will discuss:
- Difference between a conventional contract and smart contract
- How a smart contract works
- What industries a smart contract will affect
- Which blockchains can run smart contracts
Regular Contract vs. Smart Contract
|Conventional Contract||Smart Contact|
|Outlines guidelines for how something is intended to work||Outlines guidelines for how something is intended to work|
|Cannot be changed once signed||Cannot be changed once created|
|Is a document which lives on as a computer file or in print||Is a computer software which lives on a decentralized blockchain network on multiple computers|
|Requires a third party to implement the rules||Can implement the rules on its own|
How does a Smart Contract Work?
Smart contracts were first brought to light in 1997 by Nick Szabo; a computer scientist, legal scholar and cryptographer who worked towards bringing law contracts to the electronic commerce space. The smart contracts he created had triggers set up within their code so when specific actions occur, it automatically allows for the next action to happen.
Nick Szabo used vending machines as an example to show a simple smart contract model. The process involved: Someone dispenses the correct coins into the machine, selects a button from the keypad, and the item in the corresponding slot is dispensed.
This is just a simple example that works on only one machine though. When you put a smart contract onto a blockchain platform, the code is distributed throughout computers all around the world. It is here where we can set up complex and detailed smart contracts in the real world to run important systems that humans once performed in the past. When we put a smart contract onto a blockchain platform it also allows the actions to be tamper-proof, transparent and more cost-effective than before.
What conditions does a smart contract include?
As simple instances of logic, “if/when…then…” statements are written into code on a blockchain to make smart contracts function. When predetermined conditions are met and tested, the activities are carried out by a network of computers. These activities could include transferring funds to the proper parties, registering a car, sending notices, or issuing a ticket (we’ll get to the industries more in a second). When the transaction is complete, the blockchain is modified. The transaction can’t be reversed, and the results are only visible to those who have been given permission.
There can be as many stipulations as required in a smart contract to ensure the participants that the task will be performed satisfactorily. Participants must agree on how transactions and their data are interpreted on the blockchain, agree on the “if/when…then…” rules that regulate certain transactions, discuss all possible exceptions, and create a mechanism for resolving conflicts in order to develop the terms.
Many industries can be affected by the mainstream adoption of smart contracts. Think about it, very few industries are exempt from needing a contract of some sort. The section below will briefly discuss some of the industries that have the potential to effectively utilise smart contracts.
What Industries will Smart Contracts Affect?
Think about any industry that requires data to be stored – there’s a lot. Smart contracts are revolutionary for data management as they leave very little room for error and corruption in comparison to humans controlling these systems in the past. Some examples include:
Faster to process policies and easier to avoid fraudulent claims.
More secure way to store sensitive data.
More accessible voting and efficient validation for voters identity.
Supply Chain Management
Improves traceability and verifies business transactions.
Which Blockchains can Run Smart Contracts?
Although Ethereum is the blockchain most often associated with smart contracts, many of today’s blockchains, including the Bitcoin blockchain, have the ability to create smart contracts. Here are a few of the most popular:
As mentioned, the first and most popular blockchain for smart contracts is Ethereum (ETH). The Ethereum blockchain allows developers to run smart contracts as an Ethereum account. To run a smart contract on the Ethereum network developers must be able to code in a smart contract language called solidity and have the ETH gas fees to deploy.
Chainlink (LINK) actually runs on Ethereum, however adds the feature of linking off-chain oracle nodes. This means Chainlink can translate data from the real work to the blockchain which allows for even more opportunities for smart contracts on the blockchain.
Smart contracts are going to be launched on the Cardano (ADA) blockchain as soon as April 2021. It will make Cardano’s blockchain similar to Ethereum. Cardano blockchain uses the coding language called Henkell for building their smart contracts which is best suited for organizational and financial applications in the business world.
Neo is very similar to Ethereum with the main difference that the Chinese government fully backs this blockchain as opposed to Ethereum which has a group of demographic developers. NEO can also support more computer languages than Ethereum.
Smart Contracts in the Real World
In the real world, you probably won’t even notice a smart contract is being used. All you will notice is a system that has virtually no room for error as it runs on a smart contract code. Hard to believe that all these systems were done by humans in the past, and there are so many more to come.