Read detailed information of what is a smart contract (SC), how it impacts on the business and why you should migrate from paper-based processes to digital ones. ➡️ See more!
Smart contracts (SC) are becoming a priority choice for many startups and large organizations, especially when faced by intransigent bureaucracy, fees and inefficiency. Such issues could be solved with blockchain technology and smart contracts, opening new opportunities for businesses and transactions.
To provide detailed information of what is a smart contract and how it impacts on the business, let’s review the basics and why you should migrate from paper-based processes to digital workflow.
Concept and a Brief History
Why Should You Choose This Type of a Contract?
Bitcoin and Ethereum
Concept and a Brief History
First of all, smart contracts are paperless and operate in the digital environment. It is an algorithm that has been created to maintain self-executing transactions in the blockchain eco system.
The concept of SC appeared many years ago thanks to the Nick Szabo cryptography researcher:
So it is a computer-readable contract, the terms of which are automatically executed upon the occurrence of the events specified in the contract. Basically, it is a digital representation of a set of obligations between the parties, which also includes a protocol for the fulfillment of these obligations. The concept of smart contracts was originally presented without reference to any technological architecture or any business process.
Until 2014, it remained more of a theory, and with the release of Ethereum it gained wide practical application. V.Buterin, the co-founder of Ethereum, admitted that he regretted using the term "smart contract" for Ethereum. In Ethereum or another blockchain environment, the “smart contracts” term is understood as a program code for carrying out transactions, rather than a mechanism for fulfilling obligations between parties.
It means that smart contracts have functionality that automates the execution of certain tasks. For example, it can manage the relationship of the parties within a transaction, check an electronic digital signature (EDS), connect new participants, etc.
Why Should You Choose This Type of Contract?
We think many industries will switch to blockchain in the next few years, and key blockchain platforms are using smart contracts. It is obvious as it has a great future. Why are smart contracts better than regular paper contracts?
- First of all, it is clear from the definition: it is a smart solution that excludes the human factors from the key legally significant actions.
- Smart contracts work with third-party organizations (banks, registries), issuing ready-made solutions. To do this, they use oracle network services that are responsible for the data source connection. It can be the current exchange rate, price changes, payment status. The conventional web-based APIs for any smart contract could be written on a programmatic blockchain. If you are interested in how to get cryptocurrency APIs, learn more here.
- The contract is dependent on external sources of data, so the risk of violations is minimized.
- Another important benefit, it can never be changed and no one can break it.
- The transactions, profit and other aspects are validated by users/participants in the network, making it not possible for attackers to break.
- Network participants would quickly detect any attack. So we can talk about its reliability: transactions take place without the participation of external intermediaries.
- Confidentiality: the parties can remain anonymous, the main thing is to follow the terms of the contract.
- The decisions on the transaction are made by a program that works autonomously through the blockchain.
- The transactions take place in a virtual space, all its stages are tracked in real time, so we can highlight transparency as its main advantage.
Summing up, by using smart contracts, you can use cryptocurrencies that also guarantee flexibility. However, hence the problems with taxes, legislation and accounting, the future of the technology is not that simple. Solution and support of new contracts lay in new smart contract legislation which took place in the USA.
A smart contract helps automatically monitor the fulfillment of obligations under a contract. The algorithm determines whether the parties have followed their obligations or not. You can easily complete the transaction by confirming the transfer of money, shares, real estate or you can close access to assets for certain participants.
SC also has some disadvantages, that’s why we cannot completely replace the paper contracts. But it is also worth keeping in mind a nowadays digital environment, tools and infrastructure that are used by billions of people and organizations. The solution is just one of the possible options for digital development.
Let’s check what industries and fields start using the solution:
- For private financing of scientific development,
- In the commercial sphere (soon, about 70% of transactions with oil traders will be carried out on the blockchain),
- In the digital financial assets, where liabilities can be accounted for as a token (smart contracts can both determine the accounting rules and regulate the ways of buying and selling a token within the network),
- Other fields are healthcare, IoT, supply chain, legal industry, real estate, government, IT industry, and more.
Bitcoin and Ethereum
Many SC have been created thanks to the blockchain networks, for example, the most famous are Bitcoin and Ethereum. As SC is a program code that regulates the terms and subject of a contract, signed with electronic keys by two or more participants, it is stored and executed in a distributed, reliable and transparent system. In this system, any contract can be confirmed by an arbitrary node and they are all stored as a chain of transactions or blocks. These smart contracts influence the real world through special oracle nodes.
Bitcoin was one of the first of such systems. The implementation of smart contracts in Bitcoin is quite simple. Later, Ethereum has appeared with a full-fledged implementation of smart contracts. According to Dune Analytics, the number of new smart contracts on the Ethereum network reached almost 2 million - a record of 75% increase. The growth is taking place against the background of a decrease in the cost of placing a smart contract.
We believe that smart contact is our inevitable future. Many business owners are tired of the dominance of banks, tax agents, unreasonably high commissions, bureaucracy, considering that literally every transaction or payment is subject to commissions. In some countries, you can face a constant manipulation of exchange rates, the depreciation of deposits and savings, changes in refinancing rates, additional emission of funds, and more. In other words, decentralization is our future.
On the other hand, certain problems need to be solved, including the increase of the speed of cryptocurrency transactions to the level of the speed of payment transactions via bank cards (such as visa and mastercard). However, new generation cryptocurrencies with high transaction speed, low transaction costs and commissions are already presented. Additionally, there should be a recognition of cryptocurrencies as legal means of payment, at least in some countries. A natural consequence of this will be the possibility of linking the rate of cryptocurrency to the rate of fiat currencies, which will significantly reduce exchange rate and risks.
If you have questions or are interested in the topic, please, get in touch with us. We can offer affordable and fast market data solutions for what you need to do!