Smart contracts are considered one of the most essential tools in blockchain as they enable the transfer of everything right from bitcoin to goods transported across the globe. Smart contracts essentially remove intermediaries from a business contract, thereby streamlining the contractual process.
If you’re on this page, chances are you’re curious about smart contracts and how they can be applied to your business. This blog will help you understand what are smart contracts, how they work, and how you can leverage them using the secure blockchain network to conduct contractual transactions with ease, all while reducing loss of time.
What Is a Smart Contract?
Smart contracts are business automated applications or lines of code which are self-executing and function on a decentralized network like blockchain. This code manages the executions of transactions that are irreversible and trackable. Smart contracts allow trusted agreements and transactions to be undertaken among distinct anonymous parties without needing a legal system, external enforcement, or a central authority. Due to their functionality to remove administrative overhead, smart contracts are one of the best features of blockchain technology. They also make financial transactions transparent, simple, and efficient.
What Does a Smart Contract Do?
Smart contracts streamline a complex transaction process (like a loan or financing) involving several intermediaries. Usually, when more than one party is involved in a transaction, there is a probability of a lack of trust among the participants. Blockchain comes into the picture here as it stores the identity of the dealer. Using this data, the lenders can decide about credit. Post this, a smart contract will be created between the bank, lender, and dealer. The funds get released to the dealer and the repayment is initiated as per the contract. This transaction will get recorded to the blockchain and can be viewed at any time.
What Are the Types of Smart Contracts?
Smart contracts and protocols can be classified into the following categories:
Smart Legal Contracts
These contracts are the most obvious types of smart contracts. Most smart legal contracts are enforceable legally and include strict legal recourses for scenarios where the parties involved end up not fulfilling their end of the agreement. With clearly defined laws, smart contracts can simplify processes involving strict regulatory oversight like transactions in the real estate and financial market.
Decentralized Autonomous Organizations (DAOs)
DAOs are defined as communities that are present in the blockchain. These communities are defined by the rules set and implemented as code in the smart contracts. Each participant’s activity is subject to these rules, which are enforced and reached at recourse when a break is left to the program. Most smart contracts have these rules, and they work together with policing and managing participants.
Application Logic Contracts (ALCs)
ALCs have application-specific code that works together with other smart programs and contracts on the blockchain. They help in communicating with and verifying communication among devices in the IoT domain. ALCs are important in multi-function smart contracts and always work when managing a program.
How Does a Smart Contract Work?
A smart contract can work individually, but it can also be implemented along with other smart contracts. They can function interdependently as well. Successful completion of one smart contract can trigger another one and the process keeps going. If implemented properly, entire businesses and organizations can run successfully on smart contracts. This has already begun in various cryptocurrency systems wherein the laws are pre-defined. This allows the network to function independently.
What Are the Benefits of Smart Contracts?
The benefits of smart contracts are very similar to that of a blockchain.
- Speed: Smart contracts are digital and automated. It saves time as compared to manual documentation and the scope of errors is also less.
- Trust: They operate on pre-determined rules which are encrypted and shared among all the participants. This reduces any probabilities of malpractices and tampering.
- Security: Blockchain transactions work on the principles of cryptocurrency and they are encrypted. This makes it exceedingly difficult to hack into the network.
- Savings: Smart contracts eliminate the need for intermediaries as the transactions are transparent and do not require any third-party interference.
What Are Smart Contracts Used For?
Due to the ease of its functioning, smart contracts are used for all kinds of transactions across various industries, including:
- Insurance companies: Smart contracts can be used for simpler insurance processes like underwriting and payouts. With smart contracts in insurance, no third-party involvement is required, it speeds up the claim processing, and it also lowers the administrative costs.
- Health systems: Data is recorded and transferred safely. This makes it secure and does not allow access from third parties.
- Governments: Smart contracts can make voting systems completely secure and eliminate the possibilities of fraud.
- ICOs: An ICO is a crowdfunding system that uses blockchain technology. You can create a smart contract and a token for it to generate funds.
Smart contracts have enormous potential to capture global markets. It saves a lot of time and money, reduces frauds and delays, and is extremely reliable.
As smart contracts are an application of blockchain, learning about blockchain will provide you with the knowledge you need to succeed in your industry, whether you’re just starting out or looking to upgrade your company’s business model. EC-Council’s blockchain training program teaches you the ins and outs of smart contracts, with an overall focus on practical blockchain knowledge and the skills required to make you job-ready, all packaged within a flexible learning module that caters to your needs.
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