What Are Smart Contracts (And Their Applications)
Smart contracts represent another milestone in our journey to channel technological advancements for greater efficiency. In the past, we have used lines of code to revolutionize industries ranging from space travel to healthcare, and it appears we’ve hit the jackpot again. A concept introduced in the early 90s is set to transform the digital asset industry and many beyond.
As this transformation becomes apparent, most people only know what smart contracts are at the surface level. So, in this article, I’ll explain smart contracts, discuss how they work, share some of their most significant advantages, and give some examples of the best smart contract use cases.
What Are Smart Contracts?
To better understand smart contracts, let’s examine the oldest equivalent of smart contract implementation: the vending machine. When approaching a vending machine, you select a product and insert payment. The machine then dispenses the selected item without human intervention. This process is automated and executed based on predefined conditions—in this case, inserting the correct amount of money for the chosen item.
Suppose the concept of vending machines and smart contracts are similar. In that case, it’s safe to say a smart contract is simply a transaction protocol that can automatically execute events and actions according to the terms of a predefined agreement. Who knows? Maybe a vending machine inspired American computer scientist Nick Szabo to introduce smart contracts in 1994.
He used this introduction to define a smart contract as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.” However, it wasn’t until the launch of Ethereum that the concept gained traction and popularity. Then, everyone began to interpret the concept in their own way. The U.S. National Institute of Standards and Technology [NIST] even described a “smart contract” as a “collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network.” Szabo’s introduction and the NIST’s interpretation are sufficient definitions, but there’s more to uncover regarding smart contracts.
How Do Smart Contracts Work?
One of the best ways to understand how smart contracts work is to take a quick walkthrough through its typical creation process, so let’s dive into it.
The first step to getting a smart contract is defining the conditions of the agreement. Whoever creates this smart contract has to write it in code before it’s embedded in a blockchain. So, if you want to make a smart contract with a friend based on the outcome of a basketball game, here’s what the first half of the code could look like:
// SPDX-License-Identifier: MIT
In this contract:
- friend1 and friend2 are the addresses of the two friends participating in the bet.
- betAmount is the amount of ether each friend is betting.
- winningTeam is the name of the winning team.
- betSettled is a boolean that indicates whether the bet has been settled.
After defining conditions through written code, the author has to deploy it to a blockchain. The deployment can only happen if the author compiles the code into a format the platform understands. For example, Ethereum primarily uses a statically typed programming language called Solidity, and Cardano uses Plutus. Once the platform can interpret the correct format, the transaction is sent and recorded on the blockchain, making it a part of its ledger.
Depending on the nature of the defined conditions, all that’s left is for them to be met, and the contract will automatically execute. The blockchain records the execution and provides a transparent and tamper-proof transaction record. One of the most notable features of this process is the finality of the execution. Once the blockchain stores the transaction, nothing can interfere.
Advantages of Smart Contracts
The concept of self-executing contracts with terms and rules directly written in code has more advantages than you might imagine. Here are some of them:
Enhances Security of Transactions
The transactions recorded on any blockchain are irreversible and have zero chances of fraudsters or hackers altering them. Also, because of blockchain technology and its decentralized nature, there’s no point of failure like you would have with the regular financial system.
Saves Costs and Promotes Efficiency
The automation of agreement execution eliminates intermediaries like brokers and lawyers. This elimination can not only reduce processing times but also save costs on hiring those personnel. Such an advantage can help small businesses with few resources deal with more prominent firms.
Promotes Integration with IoT
Businesses with supply chains or operations with similar structures can integrate smart contracts with Internet of Things [IoT] devices. The integration can facilitate seamless interactions between physical objects and digital contracts. For example, if a business ships products to a customer, a smart contract can automatically release payment once an IoT sensor confirms the shipment’s arrival.
Examples of Smart Contract Use Cases
As an expansion of the last advantage mentioned, here are some of the most impactful applications of smart contracts and the companies pioneering them:
Supply Chain Management
Using a smart contract to automate and streamline supply chain processes can increase transparency between supply chain participants. VeChain is a blockchain platform that streamlines information flow for complex supply chains. For example, a clothing brand can use VeChain to verify the quality of its products and prevent counterfeiting.
Intellectual Property and Royalties
Smart contracts can benefit content creators and artists by managing and enforcing intellectual property rights. They can also automate royalty payments for creators to guarantee fair compensation. For example, Audius, a decentralized music streaming platform that uses smart contracts, can help artists receive fair compensation for their music streams and downloads.
Voting Systems
If adopted correctly, smart contracts can influence the upcoming U.S. elections. How? Well, the government can use smart contracts to create a voting system that records votes on the blockchain, reducing the risk of fraud and manipulation. One of the companies pioneering this use case is Voatz. Voatz is a mobile voting platform that uses blockchain technology and smart contracts to ensure tamper-proof electoral processes.
Bottom Line
Smart contracts are probably the best use of blockchain technology out there. They piggyback off the blockchain’s tamper-proof nature to create systems that increase trust, transparency, and efficiency in business transactions. As blockchain technology continues to evolve, you can expect the role of smart contracts to expand even further, paving the way for innovative and efficient solutions across uncharted sectors. Ultimately, understanding and embracing smart contracts is essential for businesses and individuals looking to stay ahead in the digital age. And I hope this has helped in some way.
