Smart contracts are blockchain-based programs that run when a set of conditions are met. It’s a type of contract in which the terms of the buyer-seller agreement are directly written into lines of code. The code, and the agreements within it, are spread across a decentralized blockchain network.
Understanding Smart Contracts
Basic “if/when…then…” code lines are inserted into a blockchain to make smart contracts work. When these conditions are met and validated, the actions are carried out by multiple computers. These actions range from registering a vehicle to marriage contracts. After a transaction has been completed, the blockchain then updates itself.
Also, transactions can’t be changed; the results can only be seen by those who have been granted access.
The Making of Smart Contracts
Smart contracts were first presented in 1994 by Nick Szabo, an American computer expert, ten years before the creation of Bitcoin (BTC). In actuality, Szabo is commonly said to be Satoshi Nakamoto, Bitcoin’s anonymous founder, a claim he has repeatedly denied. He wanted to bring digital transaction methods into the virtual world.
He sought to take electronic transaction methods and bring them into the digital world. Afterward, he wrote a paper about smart contracts where he proposed using smart contracts for synthetic assets, like bonds and derivatives. Szabo also predicted that such contracts would be used in the future for payment structures.
The Benefits
- Efficiency and Speed – The contract is immediately executed when a condition is met. Smart contracts are automated; hence there is no need for paperwork, and you waste no time manually filling in documents.
- Security – Because each transaction on a Blockchain is linked to the prior and next entries, hackers would have to alter the entire chain to change a single record. Each transaction is totally encrypted, making it nearly impossible to hack.
- Cheaper – Smart contracts eliminate the need for brokers, as well as the time and expenses that come with them, in order to perform transactions.
Future of Smart Contracts
The widespread adoption of smart contracts is quite challenging. Given the current legal structures for recognizing digital contracts, it’s very likely that a state court would uphold the validity of a code that implements smart contract terms. There is also evidence to suggest that a code-only smart contract would be protected in the same legal way.
Temporarily, we tend to overestimate new technology while underestimating it in the long run. Though smart contracts may need to evolve before they can be widely used in business partnerships, they have the potential to change the benefit and incentive structure that could determine how parties contract in the future.
Takeaways
- Smart contracts are blockchain programs that execute when certain criteria are met, in which the terms of the buyer-seller agreement are written into lines of code.
- Parties must agree on how transactions and associated data are represented on the blockchain and agree on the rules that govern those transactions.
- Nick Szabo, a computer scientist from America, introduced smart contracts in 1994.
- Smart Contracts have multiple benefits. They’re faster, more secure, and also cheaper compared to normal contracts.
- Smart contracts have the potential to change the benefit and incentive structure that could determine how parties contract in the future.
