The blockchain world is not just limited to crypto currencies and NFTs. It has a wide range of applications. In the financial sector, it has been doing wonders. Smart Contacts are one of its wonders that has made a man’s life easy.
Since the history of Smart Contract began when an American scientist Nick Szabo coined it first in 1994, with the verge of blockchain, they got a rebirth, and since then, they have been a part of evolution. In this guide, we will share all you need to know about the smart contracts. If you are a layman and know nothing of a Smart Contract, this guide is for you.
What is Smart Contract?
Smart Contracts are recorded on the Blockchain and are executed instantaneously if certain predetermined circumstances are satisfied. They are often used to automate the execution of an agreement, ensuring that all parties are instantly assured of the conclusion of the agreement. If predefined conditions are met, they can automate a workflow. Mediators are not required for executing the transactions.
How does Smart Contract Work?
Smart contracts follow the rules of simple programming. A set of conditional-based instructions are coded on a blockchain. The system then does particular actions when the conditions are met and properly verified. If any condition is missing, the specified action will not be executed.
The smart contract has wide applications. It can be used in financial transactions like releasing funds among parties when conditions are fulfilled. Similarly, it is really helpful in task execution and making the system fully automated, like releasing tickets, challan forms, and booking a car.
Since Smart Contracts are temper proof programs yet required to agree upon certain conditions by all the parties. All involved parties are needed to be agreed upon “if/when….then….” rules and define a framework for resolving disputes.
How do Smart Contracts Make Money?
A smart contract is not a coin and has no defined value. However, one can build a universal smart contract that solves the real-world problem by assigning the set of instructions. If it is worthy for different organizations, it will certainly get its market value. Moreover, the smart contract developers can make money by selling their expertise, while a third party may get one-time money by giving its input in setting up the terms and conditions.
Who program Smart Contracts?
Smart contracts can be programmed by a developer who knows computer language. Due to the hype of blockchain, organizations are providing templates and online tools to develop a smart contract.
What are uses of Smart Contracts?
No doubt, smart contracts open up a new dimension of dealings. Due to its versatility, I can be widely used in almost every field requiring problem-solving. Here are a few examples for understanding:
It is used in banking and insurance companies for error checking. In the case of a life insurance claim, the system will verify via a predetermined integrated set of instructions if the person has fulfilled the criteria or not.
In the banking industry, smart contract helps in trade settlements and releases funds from one account to another once the algorithm aligns with the defined criteria.
Smart contracts create a safe environment that reduces the flaws of the voting mechanism to manipulation. Smart contract votes are ledger-protected, making them very difficult to hack and manipulate.
Blockchain technology can store encoded health records of patients if they are protected by a private key. Due to concerns about privacy, only certain individuals would be granted access. In a similar way, smart contracts may be used to conduct research in a secure and confidential environment.
The use of paper-based systems, in which forms must be validated via several channels, has historically caused supply chains to suffer. Fraud and financial loss are more likely to occur due to time-consuming operations.
Blockchain technology can minimize such risks by giving individuals involved in the chain of a digital scheme that is accessible and secure. It is possible to employ smart contracts for inventory management, payment processing, and work automation.
What are the limitations of a Smart Contract?
Besides its advantages, there are certain limitations of Smart Contract as well.
Deciding upon the Terms
Having agreed upon certain terms and conditions is crucial for all parties involved. If any party is not willing on certain terms, the process gets unwanted delay. If the terms are required to change in the future, it will be a mess as it is hard to restructure the whole program.
No Built-in Connection to the Outside World
The blockchains smart contracts run on are isolated networks, which means they don’t have any built-in link to the outside world. Without an external link, smart contracts cannot communicate with other systems to authenticate the presence of real-world events. For example, they can’t examine the average monthly rainfall before paying out a crop insurance claim or ensure that items have arrived after complete settlement with a supplier.
Third Party Shift
Although smart contracts attempt to eliminate third-party involvement, this is not feasible. In contrast to ordinary contracts, third parties have distinct duties. Lawyers, for example, will not be necessary to create individual contracts, but they will be required to understand the regulations to build smart contract codes.
Which Crypto has Smart Contracts?
Ethereum (ETH), Solana (SOL), Polkadot (DOT), ERGO (ERG), Alogorand (ALGO), and Cardano (ADA) are a few of the famous Cryptos having Smart Contracts. Many other Cryptos are making their place in the market but are least famous.
What is Risk of Smart Contract?
Since Smart Contract is based on Blockchain, which is decentralized, it is vulnerable to hackers and any malicious attack. There always remains a risk when Govt does not own it. In addition to that, Smart Contracts are based on coding, and security mishaps can cause damage to the whole stand-alone system. However, on the other hand, you can minimize this by practicing strict audits, due diligence, and insurance protocols.