Related Definitions

Smart Contract

What is a smart contract?

In a general sense, a smart contract is an agreement among parties that has been penned completely of codes. Once executed, it is distributed across the blockchain system, making it irreversible and trackable.

The smart contract authorizes agreements and transactions to be carried out among anonymous participants without any external enforcement, central authority, and legal system.

It was first launched by computer scientist Nick Szabo in the year 1994. He is known as the father of smart contracts and compared it to an old fashion vending machine. Ethereum was the first platform to launch smart contracts in the cryptocurrency environment. 

Some of the best programming languages to build smart contracts are Solidity, C++, JavaScript, Vyper, Python, etc.  

What are smart contracts’ different applications?

  • Trade settlement: A transaction’s efficiency is hampered by a risky and costly settlement process. There is a constant risk of fraud faced by the buyer if the seller fails to meet his obligations as mentioned in the agreement.

By implementing smart contract technology in trade finance, the risk of fraud can be eliminated.

Parties involved in the transaction will be aware of any changes made in the contract, and all the modifications are immutable as everything gets recorded on the blockchain network. It also eliminates the lengthy processes of anti-money laundering, know-your-customer, and other paperwork.

  • Mortgages: Mortgage lending is firmly dependent on paper contracts. The process of approving a loan involves third parties and bank employees reviewing a massive set of documents, which are later shared via emails. The method of attesting each document manually increases the risk of human error and is highly laborious.

With the introduction of smart technology, the entire process of lending can be automated and digitized. Sharing the documents over emails can be avoided as all the documents will be made available to all the parties, and payments will be credited using electronic signatures.

  • Construction: Conventional contracting methods involve a huge amount of time, hamper employee’s productivity, and increases the chances of disputes. Combining smart contracts with other analyzing tools can help to organize and speed up the payment processing methods. The invoice processing consumes a lot of time verifying various bills like union fees, taxes, margins, etc.

Invoice processing cannot be automated entirely but can become more secure and transparent by using smart contract technology. Thus, the work is optimized, and all the related parties and contractors can view the progress on a real-time basis.

  • Insurance: The insurance industry also involves trust issues, delayed claim processing and high operational costs. Smart contracts can be utilized to speed up the transactions and automate the process partially. For instance, parties can continue using written agreements and place triggers on specified places that are tracked on a real-time basis. As the event occurs, the funds or claims can be transferred using the blockchain network.

A delayed or cancelled flight’s information can flow to the blockchain network from the airline system, and the refund process can be initiated

  • Land registry: The process of land title recording involves real estate agents examining a huge set of documents. The manual process can also lead to fraud and document alteration. Using the blockchain network, a token can store all the legal information, buyer ID, seller ID, etc. With the advantage of blockchain technology, fraud in the land transfer process can become negligible. A hacker needs a public key to access the blockchain, which is available only with the buyer. For instance, Georgia has introduced blockchain technology for land registry, which has also significantly reduced the cost of its operations.
  • In a general sense, a smart contract is an agreement among parties that has been penned completely of codes.
  • It was introduced by scientist Nick Szabo in 1994.
  • Solidity, C++, JavaScript and Python are examples of languages used to build smart contracts.
  • Smart contracts are irreversible.


Frequently Asked Questions (FAQs)

  1. What are the benefits of employing smart contracts?
  • Fast and accurate execution: Smart contracts are automated and digitized agreements that avoid paperwork processing and avoid reconciling the errors made by humans during agreement formation. It has significantly increased agreement execution speed and removed the space of human errors.
  • Transparency and trust-building: Smart contracts have eliminated the intermediaries from the agreement execution process. With the help of decentralized blockchain technology, one standard definitive agreement is circulated among the parties. It has also reduced the chance of document alteration for personal benefit.
  • Security: Smart contracts are formed on a blockchain network which is recorded in a distributed ledger. Each consecutive record is created with a previous record making it more secure. To alter or make changes in a single record, the hacker must change the entire blockchain.
  • Cost reduction: Smart contracts have eliminated the need for intermediaries, their associated delays in processing the agreements and the increasing fees. Overall, it has lowered the operational costs to the parties.
  1. What are the problems with using smart contracts?
  • Confidentiality: Enterprises or parties under a smart contract desire transparency to avoid any data alteration. Simultaneously, enterprises might hesitate in disclosing confidential information containing competitive advantages. For instance, companies or parties can use Hyperledger to enter a private smart contract, visible only to the parties involved. However, Ethereum does not offer this privacy. Therefore, parties must choose the best suitable platform according to their needs.
  • Accuracy: All the terms and conditions of a contract are coded in smart contracts. There are high chances of omission and misinterpretation of the condition by the coder, which might leave a loophole in the contract. As we progress further, we will be able to identify the loopholes and improvise the coding.
  • Unreliable inputs: Entering unreliable inputs could lead to the non-execution of contracts and errors can be time-consuming to fix.
  • Illegal activities: Coders can take advantage of the anonymous aspect in terms of identity and the self-executing nature to raise funds for illegal activities like terrorism, smuggling, etc.

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