What a Smart Contract is And Why You Need It

One of the things that most people like about blockchains is the fact that there is no “Middle Men”. Since it is a decentralized system, there’s no need to pay any intermediary, which saves you a lot of time.

There’s no question that blockchains have their problems. However, since they are faster, cheaper, and more secure than most traditional systems, we can already see some governments and banks turning to them.

Back in 1994, Nick Szabo realized that if there were a decentralized ledger, it could be used for smart contracts. At the time, they were referred to as digital contracts, blockchain contracts, or self-executing contracts. What he defined was that the contracts would need to be converted into code and then they should be stored and replicated. Plus, they would also need to be supervised by the computer’s network that runs the blockchain.

So, what are smart contracts?

Simply put, smart contracts can help you exchange property, money, shares, or anything that has any perceived value, in a transparent, and conflict-free way. Plus, there is no “Middle Man”.

Smart contracts assume the form of an agreement between the buyer and the seller. This agreement is directly written into lines of code. All the smart contracts that are created are stored on a decentralized blockchain network. Ultimately, smart contracts allow trusted transactions without any intervenience from the legal system, a central authority, or an external enforcement mechanism. All the transactions are irreversible, transparent, and traceable.

One of the best things about smart contracts is that you can use them for multiple purposes. It may be for financial services, credit enforcement, property law, breach contracts, insurance premiums, financial derivatives, crowd funding agreements, and legal processes.

Is there any difference regarding the automated banking payments?

In fact, there are many differences:

#1: Control:

While when you have a bank account, the bank itself has total control about your money, when you are using a blockchain ecosystem, there are in no control whatsoever. The truth is that the distributed consensus mechanisms mean that several parties are regularly checking al the updates to the ledgers. In case there is anything that doesn’t comply with what initially agreed, other participants will reject it.

#2: Code:

In the traditional financial institutions, they have some ways to register all transactions you made on a monthly basis. This mechanism is on one single computer that will then be only executed by the bank itself. Even though there is internal control, there ie never an external validation. However, when you have smart contracts, the code is open and can be viewed by all participants. Each participant is only able to change their part of the agreement.

#3: Transparency:

When we are looking at a blockchain system where all participants use the same code and can verify others code, as well, the smart contract logic needs to be visible and accessible to everyone. The problem is that there will be more general smart contracts and more specific ones. So, transparency, when looked at this perspective, can be both a pro and a con. This is why privacy is such a big question in blockchains.

#4: Flexibility

Most banks have already evolved and they are now allowing you to make more automated transactions, payments, among others. This wasn’t possible until a couple of years ago. However, when you look at smart contracts, it’s just impossible to ignore the “Turing complete”. This means that with a smart contract, you can do everything that a computer does. The problem is that it will take you more time and it will be more expensive.

Why are smart contracts useful?

One of the main advantages of smart contracts is that they can be particularly useful when there are multiple parties who don’t trust each other completely. Since they will all be able to revise the other party version of events, they will be more willing to do business together.

Even though this can happen with banks as well, with the difference that each party will have the copy of the contract on their hands and is signed, the problem is when the parties involved don’t agree with the results. And this can either be due to a misunderstanding of the initial trade terms, or it can be due to the “lawyer’s talk”.

When you use a smart contract, there will only be a set of terms that is written in computer code. There are no reasons for misunderstandings since the language use will be trivial. Plus, it is agreed upon up-front. After that, the contract will simply run when the bet expires or when an event happens.

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