Over the past decade, blockchain technology has become the subject of much research because of its decentralized, consensus, distributed, peer-to-peer transactions, etc. With the help of blockchain, many agreements are possibly done automatically by smart contracts. So what is a smart contract? How does it work? All will be answered through this article.
I. What are smart contracts?
1. History of formation
Smart contracts appeared before blockchain technology. It was first proposed in 1994 by Nick Szabo – an American computer scientist. At this point, smart contracts receive very little attention as there is no digital platform or distributed ledger technology that can support it.
2. Definitions
Nick Szabo defines smart contracts as computerized transaction protocols capable of executing the terms of a contract. The vending machine can be considered the oldest example of a smart contract type.
What are smart contracts? – Image: moralist.io
3. Smart contract blockchain
Smart contracts are programs on a blockchain that run when predefined conditions are met. These terms and conditions are stored in the blockchain as a programming code.
Learn more about blockchain here.
II. Advantages and disadvantages
1. Advantages
- Secure: The smart contract uses data encryption and is tamper-proof, which makes it a highly secure solution.
- Speed: The automation of tasks using computer protocols provides significant time savings compared to manually executed contracts.
- Savings: Smart contracts make it more economical by eliminating the cost of brokers or middlemen.
- Accuracy: Using smart contracts eliminates errors.
2. Disadvantages
- Difficult to change: Changing the smart contract process is nearly impossible.
- Lack of regulation: The international legal field does not have the concepts of “blockchain”, “smart contract” and “cryptocurrency”.
Advantages and disadvantages of smart contract – Image: blog.ipleaders.in
III. How does smart contract blockchain work?
Smart contracts follow “when…then…” statements written in the blockchain’s code. In other words, it operates on terms and conditions written in lines of code on the blockchain.
Contract terms can be established once the participants have agreed on how transactions and data will be represented on the blockchain. Then all conditions will be converted into programming code, showing the steps of that transaction.
These codes will be stored in the blockchain and the information will be distributed to the network’s computer nodes, ensuring that users can track the progress of each transaction.
The blockchain is updated when the transaction is complete. Therefore, this transaction cannot be modified and only the parties involved can see the results.
How does a smart contract work? – Image: blockchainsentry.com
IV. Application of smart contract
1. Decentralized Finance (DeFi)
Cryptocurrencies and smart contracts enable decentralized financial platforms to provide financial services: lending, borrowing, derivative transactions, etc., without the need for middlemen.
2. NFT (Non-fungible token)
Smart contracts enable the creation of NFTs by allocating ownership and managing the transferability of NFTs.
3. Supply Chain
With smart contracts, everyone in the supply chain can track an item’s location. If an item is lost, smart contracts can detect its location. In addition, smart contracts can also automate payments and routine tasks.
Application of smart contract – Image: defipedia.com
4. Health care
Blockchain can store encrypted health records of patients with private keys, only specific individuals are given access to records to ensure each patient’s privacy.
Smart contracts are also applied in many other fields such as Banking, Insurance, Real Estate, etc. Its usefulness cannot be denied because it makes people’s lives more convenient.
The above article is information about Smart contract blockchain. In addition to the above-mentioned advantages and disadvantages, it continues to be developed and improved with more features. Smart contracts fully have the opportunity to become a great alternative to standard contracts.
