Secure deterministic digital agreement
Smart contracts are computer programs that live on a distributed ledger known as a blockchain. The ‘blocks’ of code contain deterministic agreements that act as a digital contract. The digital contract may have pre-defined conditions which will trigger an action that causes a state change in the program. The state change may allow the distribution of value to the parties of the contract. The entire process is automated and executed through verifiable code.
Smart contracts have often been compared to vending machines. A vending machine acts as a type of hardware contract in which items will only be distributed once a pre-defined amount of money is received by the machine. If conditional term of required money is met, an action is executed by the vending machine. In this example, there is no human third party, only and individual and a physical machine. A smart contract is the same, the only difference being the machine is virtual.
What are the benefits of smart contracts?
- Provides a guarantee that the code will be executed as written
- Self-executing contractual states
- Increased financial inclusion in emerging markets
- Improved property records in emerging markets
- Allows for creation of tradable tokens tied to tangible assets
- Contracts and legal services tied to code linked to the blockchain creating an unbreakable escrow
- Increased transparency through the distributed global ledger storing all transactions
How Do Smart Contracts Work?
Smart contracts allow for the exchange of money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.
If 200 Ethereum is sent to my account number 321855e then automatically transfer house deed of title ID 746340x and grant smart lock access to the account from which the money has been transferred
A smart contract acts as a digitally enforced agreement without third party brokers, dealers, and middlemen. This utilization of technology provides cost savings to almost every conceivable industry.
Which blockchains support smart contracts?
The preferred blockchain for smart contract support is Ethereum. However, there are a number of other projects that have promising futures. Competitors include Stellar Lumens, Neo, Cardano, and Qtum.
Most tokens are built on the Ethereum blockchain, which is the second largest cryptocurrency by overall market cap. Ethereum rests only behind the patriarch Bitcoin in terms of market cap size. Bitcoin is much more widely recognized as being a long-term store of value as opposed to a smart contract platform. This is largely because bitcoin transactions are very slow and expensive and its blockchain was not specifically designed to facilitate smart contracts, but was more one dimensional as a payment ledger. Bitcoin can facilitate smart contracts, however, smart contracts are more commonly associated with Ethereum, Neo, and certain other platform token economies.
Application of Smart Contracts
Smart contracts are very beneficial and help to solve trust issues between two anonymous parties. Because smart contracts have essentially solved these trust issues, there is limitless potential for how both individuals and businesses can use smart contracts to facilitate transactions.
Time will tell exactly to what extent smart contracts will replace standard contracts and contract middlemen. As we move into a digital economy, the way we exchange value will inevitably also move digital. Given the utility value, cost savings, and security of smart contracts, the trend of widespread adoption will continue into the foreseeable future.