When you think of a contract, the traditional contract for sealing deals comes to mind. A traditional contract often requires signatures between two parties and an intermediary to assist or witness the transaction. Blockchain technology is eliminating the need for intermediaries by implementing smart contracts. This technology is viable with Ethereum since the platform allows other blockchain applications to be built on it. The blockchain runs software to verify transactions on the network. Therefore, you can complete smart contracts without intermediaries to confirm the transactions. Read on to learn more about Ethereum smart contracts and their application.
Ethereum Smart Contracts Defined
A smart contract or digital contract uses a computer protocol to verify and digitally facilitate the performance of a contract. Since blockchain is a decentralized system, all parties involved in the contract can access resources and ensure credible transactions without involving intermediaries. Nick Szabo, a legal scholar and cryptographer, studied the possible applications of decentralized ledgers and discovered their role in executing smart contracts. With blockchain providing a secure platform and programming ability that converts contracts into computer code, the smart contracts can be stored and replicated in the system supervised by a network of computers. Any transaction concerning the contract, like the transfer of money and receipt of products, is recorded on the ledger.
You can use a self-executing contract to securely exchange money, shares, property, and other valuable items. Just like traditional contracts, self-executing contracts have rules and obligations that the parties must fulfill, and failure to meet the terms leads to enforcement of the obligations. In the digital contract approach, you transfer an asset into a program, which runs the code and validates the terms and conditions. The program also determines whether the asset will move to the receiver or go back to the sender. In the meantime, the transaction is recorded on the decentralized ledger for security. While you can execute smart contracts on any blockchain, many people use Ethereum due to its high processing capability. Besides, Ethereum allows developers to program their smart contracts and gives them complete freedom to execute the contract. While Bitcoin allows the use of smart contracts, it has a limited processing capacity. Self-executing contracts are also automatic on Ethereum, provided the parties have sufficient transaction fees.
What Are the Applications of Smart Contracts?
Smart contracts are useful across the chain, from digital transactions to real estate contracts. The contracts build and verify on each other to ensure all the obligations are met. Besides, it can keep a secure record of transactions. Some of the applications of Ethereum smart contracts include:
- Management: Businesses usually endure delays and snarls in communication as they wait for approvals and streamlining internal and external operations. However, smart contracts record all transactions in a single blockchain ledger, reducing discrepancies in business operations. It also reduces independent processing and ensures accuracy and transparency due to the automated system.
- Supply Chain: Paper-based systems hamper supply chain processes since delivery forms pass through numerous channels for processing and approval. Such systems expose products to loss and increase chances of fraud, and tracking down the paperwork can be cumbersome. Using Ethereum smart contracts provides a secure and transparent platform for all parties in the supply chain to monitor goods and process payments.
- Real Estate: When purchasing a property, you need a lawyer and other intermediaries to complete the transactions. Besides, if you are selling the property, you also need an intermediary to advertise at a cost. Smart contracts ensure you complete the transaction securely without incurring expenses on commissions. Besides, it ensures both parties fulfill their obligations for the contract.
- Identity: Businesses profit from learning people’s interests, but people aren’t always in control of how the information is acquired. However, smart contracts give people control of their information and privacy. Blockchain-based systems also tokenize identities to protect them from bad actors. If users want to submit personal information on social media, they can choose the data they want to make public.
Advantages of Smart Contracts
Some of the benefits of using self-executing contracts include:
- Autonomy: Smart contracts allow users to make an independent decisions without the influence of third parties. Since the blockchain network manages execution, it knocks out the danger of brokers or lawyers interfering with the transaction.
- Trust and Immutability: Smart contracts encrypt your documents on a shared ledger to ensure transparency by both parties. Besides, any transactions on the blockchain ledger are permanent, which means no one can claim they lost the transaction records.
- Safety: Smart contracts convert your documents into encrypted codes and store them in a network of computers. The decentralized system is impenetrable; hence, you don’t have to worry about hackers accessing your information or transaction details.
- Accuracy: Completing paper forms often leads to errors that may go unnoticed until it’s too late. Automated contracts save time by eliminating paper records. Once you create the smart contract, the Ethereum blockchain will handle all other transactions ensuring accuracy.
- Speed: Self-executing contracts shaves off a few hours by automating tasks and reducing time for manually processing documents.
- Lower Costs: Intermediaries often charge commissions and brokerage fees to complete the transactions. These costs can increase the price of the property you are buying. However, using smart contracts eliminates intermediaries increasing your savings.
- Back-ups: If a central storage server suffers an attack, the data loss can have serious ramifications. However, the Ethereum blockchain duplicates information and stores it in different locations. Hence, you can access your backup at any time.
Are Smart Contracts the Future?
Smart contracts provide numerous benefits, but they also have a few challenges. For instance, if a bug affects the code leading to errors, the contract will perform unlike in traditional contracts where you can rescind the contract in court. Solving the concerns surrounding self-executing contracts will increase their application. However, many industries are already reaping the benefits of using the Ethereum contracts from real estate to healthcare and governments.
