Initially, the term Smart Contract was referred to as any legal contract in electronic or rather automated form. However, with the development of the blockchain, this term has acquired a different meaning.
A smart contract now is a special algorithm. It runs on the blockchain and serves to execute an agreement if the conditions are met.
Now, smart contracts are successfully used in many fields. They have special importance in the fintech industry. For instance, a smart contract allows exchanging assets without involving any intermediary services. Thus, smart contract development is important in many fields.
Smart Contracts Offer Numerous Benefits
Smart contracts bring plenty of benefits. The main of them are the following:
- Smart contracts are completely autonomous. When you place them on the blockchain, they start being executed when an agreed event occurs.
- They are secure. Smart contracts are a product of a consensus between parties. Once the contract is placed, none can change it.
- They are efficient. Once you place such a contract, you can be confident that it will be executed once the agreed conditions are met. The agreed transactions are performed automatically. No additional approvals are needed.
- They are cost-effective. You don`t need to use the services of intermediaries and pay them. A smart contract is executed as programmed, automatically once the conditions are met.
As you can see, the number of benefits is impressive. These are the main benefits, the most evident ones. Now, imagine what you can do with smart contracts if you use some imagination and common sense.
Smart Contracts and Their Connection to the Blockchain
How are smart contracts connected with the blockchain? Let us check it in detail. Smart contracts operate on the blockchain. There are several blockchains where these smart contracts can function. The most widely used is the Ethereum blockchain. The native Ethereum smart contracts are also relatively easy-to-use even if you aren`t an expert. To use a smart contract, you need to:
- Send the transaction that needs to be performed to a network consisting of peer nodes.
- A special algorithm checks the digital signatures of all involved parties.
- Then, the contract starts functioning. Whenever the agreed conditions are met, a party gets the funds. If the conditions are not kept, a party is punished with a penalty.
- Open databases are available. They shall contain information about the transaction parties.
- For transactions, decentralized platforms are applied.
- No human factor is involved.
- Special encryption called asymmetric encryption is used to take care of data safety.
- Bugs: like any modern solution, a smart contract can have bugs. It can be eliminated but the problems are guaranteed.
- The lack of supervision: no government organization or any other regulator controls the smart contracts.
- Smart contracts can function for now only on the blockchain network. Other systems still don`t use them.
- Some systems cannot support smart contracts.
Smart Contracts Demand Specific Conditions to Function
Smart contracts don`t work anywhere, in any system. If you want to use smart contracts, make sure that the system complies with the following requirements:
To enable your smart contract to function, the system shall comply with all the mentioned requirements.
Are There Drawbacks?
Yes, there are. Like anything in the world, smart contracts have not only benefits but drawbacks, too. Some of the most bothering of them are such as:
Thus, as you can see, the drawbacks are still significant. Especially bothering they are when it comes to the regulation. Other cons though can be fixed with time.
Smart contracts and proper blockchain are already widely applied in the world of decentralized finance. While still, there are many things to improve, these two developments have a great future in the modern world. Still, the full potential of both phenomena is not unveiled. However, on those several examples that are already available, we can see that it might be unlimited indeed.