“Smart contract” is among the terms which are frequently used in the world of Blockchain. The engineers active in the field of Blockchain and Fintech do highly apply smart contracts. Through these types of contracts, two simple concepts turn into an astonishingly complex idea; that is, writing contracts in combination with smart technologies changes into a new possibility in the world of Blockchain through which legal contracts can be registered smartly. In fact, each smart contract is a code in the computer which is automatically able to supervise and implement a legal contract and wherein some articles and clauses of the contract are registered in Blockchain. Automaticity of the process of registration and implementation of smart contracts causes a significant decrease in the transactions fees among people and no more need to any party in drawing contracts.
What Are the Features of Smart Contracts?
Smart contracts are immutable. As a result, there will be no possibility to reverse and modify their articles and clauses or anything else after being registered in Blockchain. In the Blockchain infrastructure, every contract is verified on the part of all transaction parties. Although there are no external supervisions in drawing smart contracts; a smart agent is required to further each one to assess these executive aspects carefully. Smart contracts have a set of rules. These rules are defined via computer codes. All nodes or present users in Blockchain, too, get informed about the process of registering and developing contracts.
Smart contracts actually let the users create protocols which cannot be tampered with or altered. In addition, transaction parties can start doing transactions without any prior knowledge about each other in Blockchain infrastructure. In fact, there is no need to prior knowledge and trust among the people. Since as it was stated before, smart contracts are made of computer codes and show a set of rules to the transaction parties that if any program and transaction proceeds in a way out of it, there will be no possibility to execute mentioned codes too.
Bitcoin, is the most well-known digital cryptocurrency in the world which supports smart contracts for continuous years and they have the feature to be used and transacted there; however, the main reason for the fame of these contracts is the creator of Ethereum, Vitalik Buterin.
How Do Smart Contracts Work?
When it is said that smart contracts can make a dramatic revolution in the world of trade, law, industry, and financial affairs, the aim is not to make exaggeration and magnification at all. Each smart contract consists of a collection of laws which will surely be executable. In fact, some terms and laws are set for each contract that will be realized and registered if and only if they are executed. Each contract has some terms through realizing them, furthering the process will be possible; otherwise, you cannot track and execute. If we look at this issue from the perspective of programming, executing smart contracts are followed up on in “if…then” manner. These contracts, are the codes which become executable and practical in the infrastructure of Blockchain.
In Ethereum network, mentioned contracts are entitled to execute and manage Blockchain operations which are conducted in interaction with the users. Then each smart contract is controlled by some computer codes. Blockchain technology guarantees contracts’ validity. The reason is that it copies each contract in many existing computers in the network and a copy of it is registered in a large number of existing computers. It means that each computer in Blockchain appears as a witness for the contract.
What Is the Difference Between Smart Contracts and Other Automatic Transactions?
Other automatic transactions such as automatic payment systems of banking transactions or the possibility to upload products such as music files after paying charges are different from smart contracts. Some of these differences will be pointed out in the following parts:
• There is always a third party in automatic transactions, and the banks can intervene in the transaction process and decrease or increase the amount of transaction. But there is no such intervention and control in furthering smart contracts.
• Traditional automatic transactions lacked flexibility and the code to execute the program was in the hands of the third parties in trades; however, in smart contracts, all parties present in the contract own the code. This code is executed in the system by all the people present in the trade, and it is available for all. As a result, smart contracts let the people trade with each other and do different transactions without impediments and intermediaries in the infrastructure of a decentralized network. Decentralized activities in the infrastructure of Blockchain avoid any fraud and scam in the trades and smart contracts.
What Are the Applications of Smart Contracts?
There are numerous applications considered for smart contracts; in other words, the nature of these contracts is such that it represents a wide range of applications. To reach a better understanding of features and applications of smart contracts, their three features are delineated below:
• Digital signature: each party of a smart contract confirms his/her presence with a cryptographic digital signature in the trade and transaction.
• Oracles: contract parties come to terms about the data resources applied in the transaction. In fact, both trust and adduce the same resource which informs them about furthering the transaction and trade.
• Self-execution: when the condition is realized to execute a contract, it will be followed up on automatically, and there is no need to take any measure on the part of trade parties.
These attractive features cause creating versatile applications for smart contracts. It is possible to do many things from financial trades and transactions to the other trades like imports and exports or even gambling by smart contracts.
There are many applications for smart contracts. For instance, when there is a contract on digital trading properties, the trades are easily furthered through digital payments. Given that the information is to be exchanged, through these contracts and needless to any presence and paying for intermediaries and third parties, the transactions are executed.
When there is the need for the financial transaction between two parties, the funds are comfortably transferred by the smart contracts again, and the transactions charges will dramatically decrease. In registering and transferring the documents related to the estates, different public votes, etc. smart contracts can also be employed too. Different companies, such as airlines can transfer their activities to Blockchain infrastructure and address communicating with the customers through smart contracts. For example, the fund which should be returned to the customers and travelers in lieu of flights delays can be paid back to them through the smart contracts and defining related codes in the system. Generally, every business and organization which seeks to create a decentralized infrastructure to further its objectives and missions can use smart contracts and Blockchain too.
Is There Any Possibility to Alter or Delete Smart Contracts?
It is not possible to do any alteration after registering smart contracts. But if the contract parties previously accommodate a function called “self-destruct” in the contract code, it is possible to delete it in the future; without this function in the contract code, the smart contract cannot be deleted at all.
Of course, the upgrading feature can be defined for the smart contracts. One way is to divide a contract into different parts, and smaller contracts in a way that some of these contracts are defined as mutable and the contract deleting option is provided for them, and some others are fixed, and the possibility of alteration is not defined for them; that is, a part of the code can be deleted and altered and the other cannot.
What Are the Advantages of Smart Contracts?
Smart contracts enjoy a high capacity to be personalized in different trades as the programmable codes. It means that they can be programmed for trade in different fields and with the features considered by trade parties. In addition, the costs of transactions and trades significantly decrease with these contracts besides owning very high transparency and lucidity. Smart contracts are very practical where there is the need to exchange money and information among some trade parties. These contracts can be programmed for a wide variety of trades and activities; tokenized assets, voting systems, exchanges in decentralized infrastructures, gaming industry, active wallets based on cryptocurrencies, mobile applications, etc. are some cases in point. The possibility of drawing smart contracts can be used in various areas like charity, healthcare, supply chain, managing financial affairs, and the like.
What Are the Limitations, Critics, and Vision of Smart Contracts?
It should be accepted that smart contracts are the codes written by developers, and the probability of occurring human errors is always there. Therefore, when there is highly important information and large amounts of money, expert and professional developers should be hired. Considering the fact that Blockchain system and executing smart contracts are immutable, the mistakes in developing can sustain a bulky damage on trade parties.
Advocates of Blockchain system welcome smart contracts eagerly and believe that it can employed as an alternative to further commercial affairs faster and better and remove the bureaucratic system. But there are some critics who are against this opinion. They think that many of the problems in the real world cannot be resolved through these capabilities. In their opinion, centralized systems are simpler and will not have high costs. But the launch and pervasive teaching of decentralized networks are difficult and bear high charges at the beginning. All in all, there might be some demerits and faults in smart contracts now, but this technology will remove them in the near future.
[Silamoney] “What Are Smart Contracts and How Do They Apply to FinTech?”, Sila Staff, 03 Jul, 2019
[Freshfields] “What's in a smart contract?”, Dr. Gernot Fritz
[Binance Academy] “What Are Smart Contracts?”, Official Article