Distributed Ledgers, Smart Contracts, and Cryptocurrencies, oh my! Blockchain and its associated technologies seem to be everywhere right now, and it can be a headache trying to understand it all. To ease the confusion, Sidepart is breaking it all down so you too can be a Blockchain pro.
Have you ever had a job, an apartment or a cell phone? If you answered yes to any of these questions, then you’ve used a contract. Contracts are all around us and often act as the foundation for many aspects of our lives. With the launch of blockchain, however, contracts are one of the latest systems to be updated by this disruptive technology.
What are Smart Contracts?
Smart contracts are basically digital legal agreements that exist on the blockchain. How it works is two blockchain users can make an agreement with rules and penalties which is written into lines of code to create a smart contract. Using “if-then” logic this e-contract can self-execute by confirming the agreed-upon conditions and finalizing the appropriate transaction.
Are you still confused? Hopefully, this example can help.
Matt rents out an ice cream truck for parties. Tiffany would like to rent Matt’s ice cream truck and so Matt and Tiffany make an agreement using a smart contract. Using the blockchain, Tiffany submits her payment and Matt submits the location of the ice cream truck. When Tiffany arrives at the location the payment will be released to Matt. However, if Tiffany changes her mind or the location is wrong, she’ll get her money back.
An important thing to remember when it comes to smart contracts is that although they operate on blockchain technology, not all blockchains allow for contracts. Currently, Ethereum is the main blockchain for these contracts.
Uses & Benefits
Contracts are used in almost every industry therefore, the uses for this new technology are endless. It is likely that we will begin seeing this technology popping up in everything from financial services to crowdfunding to property law.
But why would anyone want to use a smart contract instead of the traditional options we use today? Theoretically, there are many benefits to smart contracts, including:
With smart contracts, there is no need for a middleman. Right now, if you and I were to enter into a contract we would need the help of a lawyer or a bank. Although this may not seem like that big of a deal, middleman’s cost money which ultimately makes the contract process more expensive. You can avoid fees by utilizing this technology.
It’s Secure (ish)
Smart contract enthusiasts often boost the added security that these can offer. By operating through blockchain technology, these benefit from many of blockchain’s security features. This can result in the following benefits:
- Since assets are not transferred until both parties complete their end of the contract, users are protected from losing their assets to unreliable partners.
- When any user tries to change the terms of a smart contract, all participants are notified and must approve of the changes before they can go through. As such, users cannot sneakily alter contracts to their own benefit.
- Copies of every contract are stored and replicated on the blockchain. This makes sure that there is always a lasting record of all the contracts you enter into.
This all sounds pretty good, right?
Although technology can disrupt the way these contracts are developed and used, we’re not quite there yet. A quick google search will show that they can be vulnerable to hackers. This lack of security makes these unreliable and shows that this technology is not yet ready for mass adoption.
Additionally, as these operate on a decentralized platform no one really oversees this technology. With no governing body or regulations, national governments have no way of monitoring and protecting users. Similarly, the legal system is unsure of how to treat these contracts and handle any issues that arise.
Ultimately, we still have a long way to go but, they are an exciting glimpse into how blockchain technology will change the way many industries run. Stay tuned for our upcoming articles where we’ll look into other ways blockchain can change the world.
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What Are Smart Contracts? [Ultimate Beginner’s Guide to Smart Contracts]. (n.d.). Retrieved from https://blockgeeks.com/guides/smart-contracts/
Frankenfield, J. (2019, April 26). Smart Contracts: What You Need to Know. Retrieved from https://www.investopedia.com/terms/s/smart-contracts.asp
A Guide to Smart Contracts and Their Implementation. (n.d.). Retrieved from https://rubygarage.org/blog/guide-to-smart-contracts
Chatsko, M. (2018, March 09). Smart Contracts and the Blockchain, Explained. Retrieved from https://www.fool.com/investing/2018/03/09/smart-contracts-and-the-blockchain-explained.aspx
Morphy, E., & Morphy, E. (2018, April 09). The Problems With Blockchain’s Smart Contracts. Retrieved from https://www.cmswire.com/information-management/the-problems-with-blockchains-smart-contracts/