In this post, we’ll unpack all you ned to know about smart contracts, defining exactly what they are, how they work, their main features, examples of real-world applications and more.
What Are Smart Contracts?
Smart contracts (SC’s) are self-executing contracts with the terms of the agreement written directly into lines of code, thus eliminating the need for intermediaries.
How Do Smart Contracts Work?
Smart contracts work by using blockchain technology which is decentralised, secure, transparent and immutable.
The terms of the contract are written in code and stored within a block. When the specified conditions are met, the contract executes itself.
The Purpose Of Smart Contracts
The purpose of smart contract platforms (SCPs) is to host applications that offer users the ability to engage in efficient, uncensorable economic activity while minimising rent extraction on those economic activities by third parties.
The main features of Smart Contracts include the following:
- Autonomous: SC’s are self-executing which removes the need for intermediaries.
- Trust: SC’s are encrypted on a shared ledger which ensures transparency and trust.
- Backup: SC’s are stored on the blockchain which prevents loss.
- Speed: SC’s are self-executing which saves time.
- Savings: SC’s eliminate the need for intermediaries which reduces costs.
There are a range of real-world applications for SC’s.
- Finance & Banking: SC’s can be used to process transactions like loans, insurance claims and securities trading.
- Supply Chain Management: SC’s can be used to track goods at every step of the supply chain and ensure compliance.
- Real Estate: SC’s can be used to automate lease agreements between two parties and thus facilitate property sales.
- Healthcare: SC’s can be used to store and share patient records, providing access only when certain conditions are met.
Smart Contract Example
Let’s imagine a SC in the context of crop insurance which automates payouts based on specific weather conditions.
Deployed on a blockchain, the SC integrates with external weather data sources to monitor real-time conditions. If pre-set criteria, such as a certain level of rainfall, are met, the contract automatically triggers a pay-out to insured farmers.
This system therefore eliminates manual claims processing, ensuring quick, transparent and unbiased financial support based on objective weather data.
Smart contracts are self-executing agreements coded on a blockchain. They are automatically fulfilled when the pre-determined conditions are met, thus eliminating the need for a middleman.
The main features of SC’s are that they are autonomous, they ensure trust, they prevent the potential for loss, they increase speed and finally they decrease costs.
The real-world use cases for SC’s include processing transactions in finance and banking, tracking goods within supply chains, automating lease agreements in real estate and finally storing and sharing patient records in healthcare.