What is a Smart Contract and What Role Does it Play?

Smart contracts are computer programs that perform certain actions, if all the previously defined conditions are met. All information and actions from the smart contract are stored on the blockchain.

Smart Contract is one of the most important factors in many blockchain -based ecosystems.

It is believed that in the near future, smart contracts will take over and facilitate many aspects of business, mostly due to the fact that they eliminate the need for manual drafting and execution of contracts and the participation of third parties in the whole process.

To explain how smart contracts work, we will take one simplified example.

You’ve probably heard of “ crowdfunding ” platforms like Kickstarter. If you have a business idea for a product but do not have enough money to start a business, you can create your own profile (page) on such a platform where you will present your business idea in detail, hoping people will recognize your project and donate certain amounts.

For example, let’s say you opened a page on a platform like this where you say your goal is to raise 10,000 kuna. In the campaign, you point out that every person who donates the amount of 1000 Kn in return will receive your product or service from you.

During the campaign, donor money is collected on a crowdfunding platform, and remains there until the end of the campaign. If you managed to collect the amount of 10,000 Kn, the platform will forward it to you. However, if you fail to raise the desired amount, the platform refunds everyone who has donated money for your project.

What does this have to do with smart contracts?

Smart contracts are actually computer programs (lines of code) that automatically perform an action if all the conditions previously set are met . So in this example, the condition is that the campaign must collect a minimum amount of 10,000 Kn. The moment the amount is reached, the platform sends money.

What is a Smart Contract?

Taking into account the previous example, a smart contract can be interpreted as an agreement between two or more parties drawn up in the form of computer code. Smart contracts work with the help of blockchain technology, which means that all data and actions from the contract are stored on the blockchain network, and are publicly available.

Transactions executed with the help of a smart contract are automated – their execution does not require the action of third parties, and can be executed only when all the conditions are met.

How do smart contracts work?

Smart contracts operate on the principle of “ if / when …” (a certain condition is met), “ then ” (the action is performed).

Before drawing up a smart contract, the parties involved try to define all the criteria and conditions that must be met in order for the contract to be executed and the transaction carried out.

Smart contracts can contain as many conditions as necessary for the action to be done in a way that will satisfy all users.

Also, all possible exceptions must be worked out, as well as frameworks for resolving potential disputes.

Once all the points have been worked out, the smart contract can be programmed and tested.

The computer network performs actions ( transactions , registrations , etc.) when all conditions are met and verified. Once the transaction is completed the blockchain network is updated to include all the data in its own database.

Once the data is updated on the blockchain network, it can no longer be changed, and the results of the transaction can only be seen by the parties who have received permission.

Smart contracts are most often associated with the Ethereum network, as most smart contracts are coded using the Solidity programming language , with which the Ethereum network was actually created.

Apart from Ethereum, there are other networks that use smart contracts such as EOS, Neo, Tezos, Tron, Polkadot and Algorand.

A brief example of drafting and implementing a smart contract

The developer creates a smart contract by writing a code that will clearly set out the rules that must be followed to execute the contract.

For example, the rule may be: Person A will send to Person B 5 ETH 1.12.2022. years. Once the rules are defined, the developer “sends” the contract to the Ethereum network.

Once the smart contract is on the Ethereum network the contract takes effect. Thousands of computers from all over the world (Ethereum network users) then have a copy of this smart contract.

The action from the contract will be performed exactly on 1.12. 2022. During this period, no one can change the rules of the contract or take 5 Eth because the code does not contain such activities.

5 Benefits of Smart Contracts

1. Accuracy and Efficiency

Since the smart contract is coded so that it is executed when all the given conditions are met, there is no need to spend time collecting paperwork (for compiling the contract) as well as correcting mistakes that may occur when filling in information (amount, name, number documents, etc.

2. Trust and Transparency

All terms and actions from smart contracts are encrypted, but fully visible and available only to the parties who have defined the terms and who are participating in the transaction. Once the smart contract is executed and the data is stored on the blockchain, there is no way to change the previously defined items.

3. Speed

Smart contracts are based on computer code, all processes are automated, and all data is online. Process automation allows all transactions to be executed at high speed, which can save you time (e.g. you don’t have to go to lawyers and notaries more than once).

4. Security

Every transaction on the blockchain network is encrypted, making it almost impossible to hack. Also, each record of a new transaction is linked to the previous one (chain of blocks), which means that a hacker would have to change the course of the entire chain to modify one transaction.

Due to high levels of protection, smart contracts are one of the most secure data elements on the Internet.

5. Save Money

Perhaps one of the most important advantages of smart contracts is that you do not need to go to a bank, a lawyer or a notary public to execute them. This means that in addition to time, you can also save money on various activities.

Where can smart contracts all be used?

Although they are most often mentioned in the context of transaction execution, smart contracts have a wide application. For example, developers can use them to create decentralized applications or new tokens.

Except in the financial sector, they are most commonly used in the gaming industry or in supply chains.

Areas of use and application of smart contracts

1. Supply Chain Management

The supply chain is an area where the benefits of smart contracts can be easily highlighted.

Supply chains are large networks of individuals, organizations, resources, activities and technologies involved in the creation and distribution of products.

In such a large network, processes take place that can be time-consuming, expensive, and ultimately inefficient.

Some of the biggest problems in supply chains include the inability to easily track real-time data, their accuracy (due to manual data entry, which is subject to various errors).

A system that would use smart contracts with a blockchain as a basis could, for example, automatically make pre-agreed payments (between manufacturers and suppliers) without the need to issue invoices, and manually executed transactions.

One of the newer examples of the application of smart contracts in the supply chain can be found in Spain. Startup Trazable, which specializes in food production, seeks to connect with suppliers through the sharing of information about products and distribution through the application of smart contracts.

In addition to the parties involved in this process, the end user could have an insight into the whole process, in order to know the exact origin of the product.

2. Application in the Real Estate Sector

The process of buying and selling and transferring ownership of real estate is a stressful and risky business for all parties. Problems with ownership, land size, etc. are most often associated with real estate.

To ensure that the parties are transparent and fair, they hire third parties such as lawyers, agents that incur additional costs, which in turn prolongs the buying and selling process.

All the functions normally performed by a lawyer, agent, notary public can be combined into one autonomous mechanism enabled by smart contracts.

In addition to transferring ownership and assets, smart contracts could help document all the important details of a property through storage on the blockchain network.

This means that with each subsequent sale, the buyer could have access to all the data – from the year of construction, last renovation, location, and other important details.

Countries like Georgia and the United Arab Emirates began developing a land registry register on the blockchain network back in 2016.

3. Use of Smart Contracts in the Financial Sector

In the financial sector, we can currently find the widest use of smart contracts, in decentralized finance projects.

Decentralized finance has gained great popularity as it has provided a better alternative compared to the traditional financial sector.

Many DeFi applications with the help of smart contracts provide trading, credit, loan services and offer new more innovative financial products.

What makes decentralized finance attractive is that it allows users greater transparency and management without the need for a third party (banks, notaries, insurance companies, etc.) and the payment of additional fees.

Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.