What is a Smart Contract and How Does It Work
Technology is developing really fast, so many new ideas come out. Business market has to follow that changes and adjust to them. One of the trends was bringing online banking to the new technological level. With a development of blockchains and FinTech a need to automate related processes has appeared. That’s how smart contracts became a thing.
What is a smart contract?
The first smart contract was implemented in Bitcoin by Vitalik Buterin, who created Ethereum platform. However that solution was introduced in early 1990s by Nick Szabo, who was computer scientist and lawyer. He was also a creator of BitGold, which made him a key figure in history of Bitcoin company. Although the Nick’s idea was great, it couldn’t become well-known until the Ethereum was available.
Smart contracts are computer algorithms based on blockchain technology. The main goal of that solution is to go from standard finance protocol to universal tool which will automate that process and decrease chance of mistake. Put simply, smart contracts are computer codes (protocols) which are used to enter all terms of contract between parties to the transaction by blockchain technology. There can be more than two participants, it can included companies, individuals and so on. Smart contract are used to execute all terms of transaction. There is also a possibility to combine two or more smart contracts. The implementation is safe and clear. It is stored and then rejoined from decentralized inventory that prevents falsification or deletion of the parts of contract terms.
How exactly does it look like? Smart contract is a code wrote in Solidity programming language and then it is transferred into byte code which creates smart contract in a block. Then it can be executed according to the terms. For example, if there is contract for some services divided into few steps, smart contract can automate that process. After each of completed steps (if terms of the contract are fullfield) money transfer will be done automatically. On the one hand, it is convenient, because no one has to keep an eye on that. On the other hand, it eliminates danger of fraud.
Why we should trust it?
Smart contracts give a lot of benefits. First of all, it is just a really safe solution. Terms of the contract of the both sides are wrote in a code. Blockchains are infrangible so it guarantee trust for the stability of that solution. There is also no need to involve any other people in that process – no platforms or agents. Moreover, no one undesirable can get access to it. Smart contracts are also cheaper and more efficient than usually used, standard solutions. There is no need to spend your money for transaction commission.
Another benefit of smart contracts is the fact that they are much more quicker than standard ones. The process is fully automated which reduces the time. In standard way, processes have to go through a few people and have to be very often double-checked. Automatic solutions always raise accuracy by removing the human factor. The biggest disadvantage of that solution is one of its benefits – you won’t be able to change terms of contract later, all terms have to be done when blockchains are developed.
Smart contracts can be used in many different market fields. The most suitable are finances, e-commerce, insurance or auditing. As we can see in case of IoT (Internet of Things) and IoS (Internet of Services) there is no capacity problem according these solutions and their success can be an encouragement to develop smart contracts on a larger scale.