Imagine you are buying a house. You will have to sign a sales contract with the seller. However, this is not a simple process. You will need a bank, a land registry, a notary, and a lot of paperwork. Smart contracts, a blockchain-based technology, promise to make this process simpler and more secure.

What is a Smart Contract?

A smart contract is an agreement between two or more parties directly written into lines of code. The idea of smart contracts was proposed by Nick Szabo, a pioneer of modern computing, in the 1990s. Nick defined a smart contract as a set of virtual promises with an associated protocol to enforce them. The Bitcoin protocol is a primitive version of a smart contract.

Smart contract terms are stored and executed on the blockchain, an immutable distributed database. Smart contracts enable the automation of contract execution and enforcement. Therefore, it eliminates the need for intermediaries. It also increases the speed and efficiency of executing and enforcing contracts.

The arrival of the Ethereum protocol simplified the creation and execution of smart contracts. The network allows users to program complex transactions into the Ethereum protocol. Smart contracts ensure transactions are trackable and irreversible.

Smart contracts have the potential to revolutionize many industries. It enables the creation of decentralized applications (DApps) and reduces the need for intermediaries in a wide range of transactions.

How do Smart Contracts Work ?

Smart contracts follow a simple “if/when…then…” statement. The statements are written in code on a blockchain, and a network of computers executes them once the predetermined conditions are met and verified. The actions could be anything that includes a contract, for example, releasing funds to the appropriate parties, sending notifications, registering vehicles, and issuing tickets. The blockchain is updated once the transaction is completed. Blockchain ensures that the transaction cannot be changed.

A smart contract involves as many conditions as possible to satisfy the participants that the task will be completed satisfactorily. To set the conditions, parties must identify how transactions and associated data are represented on the blockchain, agree on the “if/when…then…” rules that govern those transactions, investigate any conceivable exceptions, and develop a framework for resolving disputes.

Any developer can program the smart contract. However, organizations that use blockchain for business often provide templates, web interfaces, and other supportive tools to simplify the creation of smart contracts.

Smart Contract Platforms

Below are some of the most popular platforms for developing and executing smart contracts on the blockchain:

Ethereum: this is the most popular smart contract platform. It allows users to write smart contracts in a programming language called Solidity and execute them using the Ethereum virtual machine (EVM).

Pact: Kadena’s Blockchain native smart contract language. According to kadena’s github, Pact is an open-source, Turing-incomplete smart contract language that has been purpose-built with blockchains first in mind. Pact focuses on facilitating transactional logic with the optimal mix of functionality in authorization, data management, and workflow.

Hyperledger: an open-source and flexible platform that supports smart contracts. Hyperledger was developed by Linux Foundation. It is not a cryptocurrency. The platform uses the Go and JavaScript programming languages.

Solana: the platform boasts fast transaction speed. It uses Rust, C++, and C languages. These are popular programming languages, therefore, developers do not have to learn new programming languages.

Avalanche: it offers high transaction speed and low transaction cost. It supports Go, TypeScript, JavaScript, Python, and Vue.

Counterparty: the platform incorporates data into Bitcoin transactions. It uses the crypto blockchain and allows contracts to be developed on it.

Polkadot: this network is an alternative to blockchain and is famous for its ability to support more transactions through a feature called parachains, chains within chains.

What are the Benefits of Smart Contracts ?

Smart contracts ensure speed, efficiency, and accuracy. The contract is executed immediately once all the conditions are met. Smart contracts are time-saving since they do not require paperwork to process. In addition, there is no time spent reconciling errors that often result from manually filling the documents.

Smart contracts also promote trust and transparency. It eliminates the intermediaries and shares an encrypted record of transactions across participants. Therefore, there is no need to question whether information has been altered for personal benefit.

Additionally, smart contracts offer high security. The transactions are encrypted making them hard to hack. Moreover, each block containing information is connected to the previous record in a distributed ledger, meaning hackers would have to alter the entire chain to modify a single record.

Furthermore, smart contracts save time and money as they eliminate the need for intermediaries to handle transactions.

Use Cases of Smart Contracts

Smart Contracts can be used in various contexts to facilitate, verify, and enforce contracts. Here are a few examples:

Decentralized Finance (DeFi): Smart contracts support the building of various financial instruments on the blockchain network without relying on intermediaries such as brokerages, crypto exchanges, or banks.

Real estate transactions: Smart contracts can be used to streamline the process of exchanging property ownership. For example, a buyer and a seller can agree on the terms of a real estate sale and use a smart contract to automatically transfer the ownership of the property to the buyer and funds to the seller once the terms of the contract are met. Smart contracts offer various benefits to the real estate industry, including fractionalization and improved liquidity.

Supply Chain Management: Smart contracts can track the movement of goods through the supply chain, ensuring each party is performing its obligations on time. For example, a smart contract would only release payment to a supplier once the goods have been received and inspected as per the present agreement.

Financial transactions: Smart contracts can automate the execution of financial agreements. For example, a smart contract can automatically execute the terms of a derivative contract once the predefined conditions are met.

Employment contracts: Smart contracts can be used to automatically enforce the terms of the employment contract. For example, a smart contract could be used to release payment to an employee after completing the agreed work.

Crowdfunding: Smart contracts can be used to manage contributions and distribute funds in a crowdfunding campaign. For example, the contracts can be used to release funds to a project creator once they reach their fundraising goal.

Records Keeping: Smart contracts can be used to facilitate the storage and maintenance of records. For example, it can be used to store and update millions of confidential patient records in healthcare.

Smart contracts are also used in human resources, intellectual property, elections, and insurance.