The emergence of blockchain technology has brought dynamism to various spheres of life. Once an innovation to ease transactions, the world discovered that blockchain could do much more than streamlining transactions. The technology could do so much more through the help of smart contracts.
Smart contracts have been heavily discussed since American programmer Nick Szabo first mentioned them in the early 1990s. From that time till now, various industries have developed smart contracts to expedite transaction processes. The business world has also jumped on this software, using it to their maximum advantage.
What Are Smart Contracts?
Smart contracts are self-executable consensus between two parties written and encoded on a blockchain. They execute an agreement automatically once both parties fulfill their obligations.
For example, a buyer and wholesaler draw up a contract stipulating the supply of 40 pounds of roofing sheets to the buyer at an agreed date. If the obligations are fulfilled, such as the buyer confirming the goods shipment and excellent condition, the wholesaler receives his payment automatically through the linked payment system.
With smart contracts, parties involved can be confident in transparent transactions. Smart contracts are written in programming languages, such as Solidity, and encoded on blockchains like Ethereum. Compared to typical computer programs, smart contracts can’t be reversed or altered. This makes them ideal for business applications.
Typically, smart contracts aren’t legally enforceable because they are programmatically encoded. Both parties involved must put in place some legal action for proper enforcement.
The Importance of Smart Contracts
Smart contracts are an integral part of the blockchain system, capable of transforming the business world. They are amongst the building blocks of decentralized applications. Because third-party manual verifications aren’t mandated, smart contracts are less expensive and faster.
These self-executable programs are also safe since they are encoded on a blockchain. Blockchains are not susceptible to exploits or have single points of failure. Parties have access to the records, which gives the buyer and the seller peace of mind.
How Smart Contracts Work
Smart contracts function on a specific virtual machine supported by blockchain or a distributed ledger technology. Drawing up a smart contract starts with the blockchain network developers and business associates teaming up to state their needs, terms, and conditions in response to certain events. These events could be the receipt of a shipment.
These events convince the other party that the work will be executed appropriately. Given that unfortunate circumstances like death or natural disaster could occur, it’s essential that the parties add these to the terms and conditions during the initial smart contract development.
The events are encoded using logic. The developers test it to verify its execution. Once the application is written, it is sent to an audit team for review. This stage is critical because it confirms the accuracy and reliability of the smart contract. Upon validation, the smart contract is housed on a blockchain.
The smart contract will listen for any event that will trigger execution from an oracle, which shares live data. After execution comes settlement.
Use Cases of Smart Contracts in Business
Smart contracts are perfect for businesses because of their efficiency, autonomy, security, and transparency. In the business world, they are crucial in monitoring the state of the transaction and enforcing agreements.
Some of their uses include:
● Storing information about a product, business registration number, etc
● Managing user agreements to prevent conflicts
● Limiting funds transfers by allowing a specific number of individuals to give the go-ahead
● Simplifying business transactions, which can become highly complex
Despite the several benefits of smart contracts, they have drawbacks. They are written by programmers. There’s a huge chance that they may contain some errors. If housed on the blockchain without checking, reversing such mistakes is impossible.
There’s also the regulation aspect. Blockchain technologies are under the government’s microscope. Should the government set up regulations, it could get complicated for those relying on smart contracts.
Conclusion
Blockchain is revolutionizing the way we do business through smart contracts. It has the potential to improve business practices, expedite transactions, and enhance transparency. Since smart contracts are encrypted on a blockchain, records are safe and immutable. That reduces the chances of fraud occurring.
Smart contracts are here to alter the game. They will improve efficiency and boost blockchain adoption in the future, given their massive potential.
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