Businesses of all sizes and in all industries benefit from written agreements. And yet, they typically cause burdens and are the subject of commercial and legal disputes. A problem like this, however, can be resolved by using intelligent contracts instead of traditional ones. A blockchain-based smart contract intends to facilitate trade and business between known and unknown parties, often without a middleman. How do smart contracts in blockchain work, however? To learn more, keep reading.
What are smart contracts in blockchain?
A self-executing program known as a smart contract automates the steps necessary to fulfill the terms of a contract or agreement written directly into lines of code. The transactions are irreversible and trackable, since smart contracts are based upon blockchain networks.
Smart contracts are contracts that are stored on the blockchain as coded documents. By automating agreements between the maker and the recipient, they become unchangeable and irreversible. Its main objective is to execute contracts automatically without the need for middlemen, enabling immediate confirmation of the agreement by all parties. They can also be programmed to start a workflow in response to certain conditions.
A smart contract is deemed to have been executed after all of the requirements outlined in the smart contract’s code have been satisfied. Smart contracts were made popular by the Ethereum blockchain, and they have given rise to various decentralized apps (DApps) and other use cases on the network.
How exactly are smart contracts carried out?
Consider digital “if-then” declarations between two (or more) parties as smart contracts. The agreement can be honored, and the contract is deemed finished if one group’s needs are satisfied.
Say a market requests 100 ears of corn from a farmer. The latter will deliver, and the former will lock money into a smart contract that can be released upon delivery. The money will be released immediately when the farmer fulfills their end of the bargain, following the conclusion of a formal contract. If the farmer misses the deadline, the agreement is nullified, and the money is returned to the client.
The aforementioned use case is obviously rather limited. Among other advantages, smart contracts can be configured to function for the general public, replacing centralized watch-over in commercial transactions.
Advantages and Disadvantages
Like blockchain technology, smart contracts have the same main advantage of eliminating the need for third parties in an agreement. Other advantages of smart contracts in blockchain include the following:
- Efficiency and Accuracy: Smart contracts are self-executing, which means that they automatically execute when predefined conditions are met. This does away with the need for manual intervention, reduces the potential for errors, and speeds up the process.
- Cost Savings: Since smart contracts in blockchain eliminate the need for intermediaries, they reduce the associated costs, such as fees, commissions, and salaries. This makes transactions more affordable for all parties involved.
- Accessibility: Smart contracts are decentralized, which means that they can be accessible in any corner of the world, given there is a decent internet connection. This makes them particularly useful for cross-border transactions.
- Security: Smart contracts are encrypted and then stored on a decentralized network, making them resistant to hacking and other forms of cyberattacks. This enhances the security and privacy of the transactions.
The following are some disadvantages of smart contracts:
- Immutability: While the immutability of smart contracts in blockchain can be a benefit, it can also be a disadvantage in certain situations. Once a smart contract is deployed on the blockchain, it cannot be changed, even if there are errors or changes in circumstances.
- Complexity: Smart contracts can be complex and difficult to understand, particularly for individuals without a technical background. This can lead to errors or misunderstandings that could impact the outcome of the transaction.
- Dependence on Technology: Smart contracts are dependent on the underlying blockchain technology, which can be susceptible to technical issues, such as network congestion or software bugs.
Which blockchains employ smart contracts?
Smart contracts were first introduced on the Ethereum blockchain, which is currently the most popular blockchain for smart contracts. However, several other blockchains also support smart contracts, including:
- Binance Smart Chain (BSC)
Each of these blockchains has its own unique features and advantages for deploying smart contracts, and the choice of blockchain depends on the specific use case and requirements of the project.
Notably, while Bitcoin was not originally designed to support smart contracts, it does have limited support for them through a feature called “Script”, which is a simple programming language used to define transaction outputs. Script is a stack-based language that allows for some basic scripting operations, such as multi-signature transactions and time-locked transactions.
However, the Script language used in Bitcoin is relatively limited compared to other blockchain platforms, such as Ethereum, which was specifically designed to support more complex smart contracts. As a result, while Bitcoin can technically support some basic smart contracts, it is not widely used for this purpose, and other, newer blockchains are typically preferred for deploying more sophisticated smart contracts.
I do hope this post has helped you learn about the concept of smart contracts in blockchain, and what they are used for. Are you curious to learn more about cryptocurrency, NFTs, and Blockchain? You can find more articles you like on my Medium page!