A smart contract is a digital, self-executing contract. It can electronically expedite, validate, or implement the execution or negotiation of an agreement. A distributed, decentralized blockchain network functions as its storage.
Almost a decade ago, blockchain laid down the foundation to change global finance through cryptocurrencies. Now, this technology is changing the legal world through Smart Contracts.
An increasing number of organizations use smart contracts to close deals and agreements. This makes it compelling for us to explore what Smart Contracts are. Are they just a technological trend? Or a disruptive, transformative technology with lasting effects?
Let’s find out more about Smart Contracts and what role the Ethereum blockchain plays in their creation and use.
Smart Contract Table of Contents
Blockchain’s next innovative offering is Ethereum, after its separation from Bitcoin. Ethereum became the second major cryptocurrency and functions as a tool to build decentralized blockchain applications.
One such application is through Smart Contract.
Blockchain 2.0
When blockchain was launched in 2008, only cryptocurrency tokens like Bitcoin could have been exchanged.
With smart contracts on Ethereum—also called digital contracts, blockchain smart contracts, or self-executing contracts—valuable things can now be exchanged, including services, products, loans, and bonds.
A notable thing about blockchain is its decentralized design. Blockchain transactions can be accessed by all parties involved—as long as they have the “key”—they can do all transactions themselves. This setup eliminates the traditional middleman from the equation. It likewise eliminates conflicts and enables time savings.
Blockchains are far more secure, inexpensive, and faster versus other technologies. Their vast advantages are compelling more and more global organizations such as Microsoft to use smart contracts in their operations.
Governments, banks and other organizations across the world are increasingly deploying them. The global smart contracts market is expected to reach US$300 million by 2023.
Smart contracts have myriad applications. As a form of smart contracts law, many organizations now use them for legal processes and property law.
Banks utilize smart contracts examples from basic financial services to the more complicated financial derivatives. Crowdfunding agreements, insurance premiums, and others use smart contract to expedite their transactions.
What is the definition of a smart contract?
One simple smart contract definition is that it is a group of computer codes that can self-execute when predetermined conditions are met. A blockchain or a distributed ledger holds the transaction outcomes.
People typically pay for the services of a notary public or a lawyer to have their documents processed. With smart contracts, they can create, enforce, and complete a deal or agreement by themselves. These allow people to execute deals without any third party.
Smart contracts don’t only establish the penalties and other obligations of an agreement like how a traditional contract does. They can carry them out automatically.
These digital contracts offer numerous potential applications in various industries. Smart contracts already work in tandem with the predicted currency of the future–bitcoins.
Three essential aspects
First, a smart contract is a computerized agreement between two individuals. Smart contracts exist on a blockchain—a public database—which make them immutable.
Second, a blockchain executes a smart contract. This means the agreement can be done without relying on a third-party mediation. Third, its transactions only transpire once the agreement conditions are fulfilled. This eliminates trust issues from emerging.
How are smart contracts used?
Nowadays, businesses want to streamline their processes and accelerate current workflows. Most are using tools like marketing automation platforms to simplify their operations to the hilt.
Businesses can leverage smart contracts for these and a host of other applications. Here are some smart contract examples that digital contracts provide.
Legal Use
The obvious sector that would take advantage of smart contracts is the legal profession. These new digital forms of contracts will change how documents will be certified.
Smart contracts offer a cost-efficient, impartial solution for people. The need for cumbersome notarization decreases.
Government Use
With the help of smart contracts, government agencies can easily enact deals to uphold democratic and legal endeavors
A city or municipal government can integrate smart contracts in its voting system. The likelihood of any election-related crimes will become impossible since votes are stored in a highly-secured distributed ledger.
Healthcare Use
Smart contracts help healthcare companies provide confidence to patients that their personal information is safe. They can enhance the insurance trial processes and offer easy access to cross-institutional data.
Digital contracts allow seamless monitoring of patient interactions and easy tracking of system efficiencies. Combining smart contracts with reliable medical practice management software solutions can help elevate productivity.
Real Estate Use
Real estate firms can use smart contracts for signing deals between buyers and sellers, renters and owners, etc.
One online real estate marketplace, Propy, is already among the many uses of smart contracts. Buyers can easily search and buy using the system, which offers unparalleled fairness and legality.
To further boost productivity, it’s good to integrate digital contracts with today’s best real estate management software solutions.
Merchandising Use
Supply chains usually involve negotiations. They would stand to benefit immensely from smart contracts. Supplier and logistics firms can use smart contracts to minimize risks and automate tasks like invoicing and product releasing.
The system can execute deals and manage approvals. Smart contracts can be used regardless of the type of marketplace or the things being sold.
Is a smart contract legally binding?
Are smart contracts legal?
The main concept behind smart contracts is using programs to administer the stipulations of a contract. It uses of cryptography to guarantee fraud protection, transparency, and anti-tampering.
These digital contracts automatically warrant assumed legality. There’s no specific smart contract law yet.
Smart contracts should be considered as software programs that can assume a contractual nature when the engaging parties decide to do so. They’re a tool to enforce legality. They’re not by themselves inherently legal instruments.
Three Elements of a Contract
Having said that, a legally-binding smart contract must necessarily fulfill the three elements of a traditional contract.
First, a party must initiate an offer. Second, the counterparty must agree to the offered terms. Third, parties bargain on shared promises and obligations.
Simply put, like in traditional deals, smart contracts must transfer some type of value at a present or upcoming time.
Legal basis
How are smart contracts enforced? There are existing laws that already recognize the use and legal nature of smart contracts. These tools can assure businesses of their legality and security.
For instance, one such law is the Uniform Electronic Signatures Act and Electronic Signatures in Global and National Commerce Act. This existing statute already recognizes, allows, and validates the use of electronic signatures and electronic records. This involves those that use blockchain.
The law is ready. Users only need to work closely work with lawyers and use it with caution.
What steps are needed to store smart contracts in blockchains?
An open-source blockchain, Ethereum executes smart contracts. Highly-secured, its blockchain database stores smart contract transactions, including their source code.
Developers use Solidity for writing Ethereum smart contracts. This high-level programming language helps developers write self-enforcing smart contracts that run on the Ethereum Virtual Machine (or EMV).
Within an Ethereum database, smart contracts exist as bytecodes. These codes form the core of Ethereum’s disruptive power and innovative potential.
What’s the system behind Ethereum contracts?
The Ethereum blockchain is a massive computer network that allows codes to run in a decentralized, distributed manner.
This blockchain doesn’t charge for time per se. It charges for every executed instruction on its network.
This blockchain executes the Smart Contract generation. Ethereum’s primary scripting language is Solidity.
How are smart contracts created?
An EMV allows programs like Solidity to create smart contracts. An EMV implements program execution on every node of the Ethereum network. Every system node runs the program in a synchronized manner to guarantee that no execution can be tampered with.
The system functions as a control to prevent going beyond the network’s computational capacity.
The cost, which only involves executed instructions, covers the network usage, storage use, and the total number of executed instructions. Users can only pay using Ether, the Ethereum digital currency. Buying Ether is like purchasing a Bitcoin.
With Ethereum’s configuration, any developer can code a simple program that can be executed in a decentralized, distributed network.
The network replicates the code and its storage database. This process secures and tamper-proofs the program code.
The network assigns a unique address or ID as reference for the uploaded code. The ID or address can trigger contract execution at any time.
Three types of transactions
On a regular computer, we interact with it using clicks. In Ethereum, we interact with transactions, of which there are three kinds.
The first type of interaction is the essential currency exchange between two accounts, using Ether. We can use Ether to transfer, share split, or give to others over the Ethereum network.
The second type is somewhat more complex, involving the creation of smart contracts. This entails uploading the codes and sending Ether to pay for the execution.
The third is program execution. This involves the transferring of money to the program’s unique ID (or address) to trigger the execution.
A sample Smart Contract code.
How does a smart contract work?
A smart contract is a computer application that operates inside a blockchain. Two or several parties agree to the set of rules stored in the contract.
It’s like a typical application that implements some business rules. It can only use a blockchain as a database. Here are the key aspects of a smart contract:
Identify Agreement
Parties engaged in the smart contract determine a shared, agreed opportunity and intended results. Possible agreements are vast, from simple business transactions and rights transfer to asset swaps.
Set Conditions
Parties can decide either to initiate their digital contracts by themselves or by fulfilling certain criteria such as natural disasters or financial market movements.
Other conditions that could launch smart contracts include religious occasions or important holidays.
Code the Business Logic
Like other computer programs, a smart contract is an application designed to automatically perform once the conditional parameters are reached.
Encryption & Blockchain Technology
In a blockchain, encryption is used. This provides the needed security in authenticating and verifying the messages exchanged among the involved parties.
Processing & Execution
A smart contract gets written to a block in a blockchain iteration. This occurs after reaching consensus via validation and authentication.
Once the code is executed, the results are memorized for verification and compliance.
Network Updates
Every computer connected to a blockchain network automatically updates its ledgers. This demonstrates the blockchain’s new state.
Upon authentication and posting, no one can alter a record in a blockchain.
Only append-only actions can be done.
What are the benefits of Smart Contracts?
Here are some of the major benefits that smart contracts can bring to your business:
Direct business relationships
The blockchain continues to function as prearranged. All agreed terms and conditions are accessible and visible to concerned parties.
Because of its design, it’s impossible to dispute the stipulations the moment a smart contract has been determined. This makes smart contracts highly reliable.
Integrity & Trustworthiness
The network will sustain its integrity. The terms and conditions of smart contracts are visible and accessible to trusted parties.
There’s no way to dispute the conditions of a smart contract. The parties can fully rely on the smart contract.
Speed & Security
Smart contracts use code and live on the internet. They execute transactions quickly. This saves time for many business processes and eliminates the need to process documents manually.
Smart contracts use the same level of security as a cryptocurrency. As of today, they’re the safest way to store data on the web.
Efficient records keeping
Each smart contract is a digital record that can be easily stored and accessed as needed.
Paper-free
Smart contracts are stored digital space, securely and cost-efficiently.
Is it time to use Smart Contracts?
Smart contracts help you exchange money, property, shares, and virtually anything of value. You can all these in a problem-free and transparent way, without needing the traditionally ubiquitous middleman.
Using smart contracts is simply inevitable that as technology continues to change how people conduct business as we know it.
This new way of creating and executing contracts is already providing numerous advantages to existing users. It includes a very high level of security, cost and time savings, anti-tampering feature.
By the way, in case you’d like to try using a smart contract for your business, you can easily buy Ether using a trusted payment gateway or credit card.
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