What Is A Smart Contract?
Imagine a revolutionary payment gateway where you can instantly receive what you ordered and purchased. It’s a payment system where there are no worries about the other party holding up their end of the bargain- a system that doesn’t require a third-party verification to pay you. Well, that system is here already. It’s the smart contract system.
What does a smart contract mean?
A smart contract is basically a digital code that looks like a legal agreement or contract. It’s made up of contractual clauses sourced from digital codes via blockchain technology. A smart contract cannot be altered or changed once completed. Also, once a smart contract transaction commences, it cannot be stopped or reversed.
The blockchain network undergoes constant extension so that it can keep executing and recording the transaction. This constant extension of the network also allows for the proper execution of smart contract transactions. By default, smart contracts are legally self-sufficient and self-oriented, so any mistake that occurs during the making of the code is taken to be part of the code. Smart contracts are transmitted via Ethereum Vending Machines and via Ethers, a blockchain currency.
The Origin of Smart Contract
The origin of this payment system can be trailed to Nick Szabo. Nick Szabo said that smart contracts are a body of promises written digitally with protocols to make sure those promises are enforced. However, Nick Szabo didn’t originally invent the concept of the smart contract. He utilized Ricardian contracts which originated from Gary Howland and Ian Gry.
These contracts were utilized in asset transactions in 1996. The concept of the Ricardian contracts was founded on parameters and principles such as:
- The contract should be given to holders by an issuer.
- It should be easily readable.
- It should be easily identifiable.
- Signatures on the contract should be digital.
- Issuers and holders of the contract should be secured.
The parameters above eventually wound up being the foundation on which Nick Szabo and a host of other researchers continued to develop and explore ways to design or create smart contracts and make them relevant and operative in a broad range of issues and topics.
The Workings of a Smart Contract
There is a single principle that triggers the enforcement of a smart contract. It requires satisfying all the conditions or requirements embedded in the code for it to be enforced. The smart contract being designed by blockchain is not developed to favor any party. The smart contract is typically made using the format of a regular contract. Like the regular contract, it employs the use of ‘if, when, and then’ which are contract lingos. A developer then programs this language into a code. They program the code utilizing a digital language to ensure this code will be fulfilled or enforced.
Let’s use a real-life scenario to better explain how a contract works:
Douglas is selling a car worth $500 to Janet. The moment Janet makes the full payment for the car, the documents certifying ownership of the car are handed over to Janet. There is no need for third parties to complete the transaction. Just as Janet doesn’t need a third party to get the documents and car ownership, Douglas doesn’t also need a third party such as an insurance company to get the payment for the car. So in essence, this transaction took place successfully between two parties without the need for third-party verification. A smart contract is built to work exactly like that.
When making a smart contract, you should ensure that all participants have to fulfill the contractual stipulations to ensure that no conflict occurs. The contract also has to meet the ‘if, when and then’ specifics so that it can be legally enforced. For a smart contract transaction to be deemed a success, it has to be processed through the Ethereum Virtual Machine, and payments for the smart contract are made via the Ether currency.
Enforceability and Legality
This is a slightly new area in the world of smart contracts although it’s kind of a grey area as well. The reason is federal law has no provision for making or enforcement of contractual laws. These laws and powers are responsibilities of state regulatory bodies and establishments for them to carry out or execute. The extent of this enforcement is limited to the state in question because various states can make laws in the way that’s most suitable to them. A contractual law in Indiana won’t be the same as the one in Texas or Arizona.
At the federal level, there are just a small handful of laws that enforces smart contracts. For example, the Uniform Commercial Code stipulated that contracts that are written and clear are to be enforced. This triggers uncertainty about the code, alienating other kinds of contracts such as e-contracts. If the language of a said contract lacks clarity, it makes its readability questionable. This is where another legislation stepped in. The Electronic Signature Recognition Act (E-sign) and Uniform Electronic Transactions Act of 1999 ensured the recognition of digital signatures in transactions. This legislation stipulated that transactions may not be denied legitimacy, enforceability, or validity because such document was created or developed electronically. In this context, that means a document developed using an enforceable computer code or program.
However, despite the legitimacy of smart contracts, there are legal implications and ramifications pertaining to the development, execution, and enforcement of documents that you can use to create a smart contract. For example, when using contractual laws there are issues known as consumer protection, general terms, and how to handle null contracts. The issue of null contracts is particularly challenging because once you have developed the contract, it will be hard to nullify or modify the contract if the contracting parties have a change of mind regarding a specific clause.
There is a solution. Certain areas can be solved by creating a totally new transaction which can be utilized to rectify the issue that occurred with the previous transaction. Another legal difficulty is how to handle the liability that is bound to come from damages because of an incomplete and inaccurate code. This makes it challenging for anybody to authenticate how it functions and the necessary measures to be carried out to ensure that the problem is rectified.
Corporate law is one of such areas where this problem can be handled. For example, there is a need to stipulate how to handle independent organizations and how to aid people in the navigation of the crypto-currency world. Furthermore, there is a need to deal with contracts that are identical or very similar in appearance. The presence of these issues provides an opportunity for the necessary regulatory structure that can handle or rectify such issues.
Top Six Benefits of Smart Contracts
Smart contracts offer numerous benefits and they are as mentioned below:
- Safety of Usage
Smart contracts are very safe and secure to use. This is because it doesn’t require the presence of third parties to validate or verify a transaction. The absence of third parties removes any probability of someone gaining illegal access to the accounts of any of the contracting parties. This way, one can’t modify codes or steal ethers from their account.
- Reliability and Transparency of Transactions
Smart contract transactions are reliable and transparent because anyone can easily check it. You just have to check the network. The transactions are public records, which means you can easily access these transactions and verify them.
- It’s Independent
Smart contract as stated earlier has no need for middlemen or third parties. This self-reliance enables the quick and easy processing of transactions without the participation of third parties in such transactions. It also makes it easier for you to receive your money from such transactions.
- Smart Contract is Cost-Effective
It removes the necessity of a code check, capital provision, or transaction verification by a number of third parties. The result is that the companies won’t have to deduct their service fees from your transactions.
- Smart Contract is Accurate
Because of the absence of human computing on the system, there is a minimal allowance for human errors except in the area of code execution. This results in a highly accurate system bar any human involvement.
- Quick and Efficient in the Hands of Anyone
Once the stipulated conditions are satisfied, it eliminates the necessity for signed paperwork. Also, meeting the contract conditions and the absence of paperwork to sign instantly activates the transaction. Let’s consider this with the example mentioned above. If the code was designed to be executed the moment Douglas sells his car to Grace, the transaction is automatically activated and Grace will instantly receive ownership of the car.
Smart Contract Applications
Smart contracts create the chance to examine various options in terms of financial transactions. They also offer the opportunity to radically change the workings of various organisations and industries. Some of the major places where these transactions can be utilized are:
- Insurance Firms
The majority of the operations in an insurance company rely on two parties: the insurer and the insured. For example, if Josephine takes health insurance, a smart contract containing her hospital preferences and the premiums can be created. Once the contract has been made and signed, that contract is now enabled to utilize Josephine’s information to settle her medical bills and produce the deductibles, if needed.
Smart contracts can also be utilized in life insurance. For example, when a person takes a life insurance policy, the provisions of that policy and the beneficiaries can be designated in that contract.
- Supply and Logistics
Supply and logistics demand a lot of attention to detail and require constant tracking for goods being transported. The use of smart contracts can make the transportation of goods from sellers to buyers seamless and quick. The company handling the logistics can provide the list of goods being transported so that they can include them in the warehouse.
A robot is then utilized and configured to track the list of items being shipped. Once the robot verifies or authenticates the shipment, that information is transmitted to the smart contract network and the payout for the companies.
- Assisting in Business Management
Companies can use smart contracts in the different aspects of operations of business management. For example, the Human Relations department can use a smart contract to carry out payroll operations such as payment of staff, instead of waiting on the account and finance departments to handle payments. Employees can also receive payments via smart contracts designed to make payments on a certain day of the month instead of handing that money to the bank. This way, they can avoid bringing in a third party into the transaction.
Companies can also experiment with other ways to ensure that contracted workers receive their payment first and the transaction is seamless and quick compared to having the funds pass through a number of documents for authentication. Furthermore, managers can monitor and disperse funds to various forms and make payments to several entities in record time.
The smart contract helps to make quick financial decisions. It can help decide how to improve cash flow. Also, it enables companies to leverage on increasing their portfolios and creating various streams of income by placing their money in various accounts and smart contracts.
- Initial Coin Offering
Initial coin offerings enable app developers to receive investments that can fund the development of their coins. Coin offerings provide an opportunity to generate funds for various companies who may want to venture into cryptocurrency. Business startups can also use this platform to increase their portfolios and generate funding for their business operations rather than relying on the traditional method of searching for investors.
- Government Activities
Even the government can utilize smart contracts for a number of its activities. For example, federal workers and contractors can receive payments via smart contracts to lessen the number of people on payrolls. Furthermore, in the political sphere, smart contracts can make voting systems more effective. It eliminates the need for a third party in the voting transaction.
The voters can cast their votes in a credible, fair, secure, and free setting because nobody can hijack the voting process. A plus of this application is that the voting statistics are open to the public so that also eliminates the need for observers to monitor its transparency.
- Supporting the Healthcare Sector and the Protection of Medical Records