blog / Technology
How Do Smart Contracts Work? What are Their Best Examples?
Contracts govern most parts of our professional and personal life and are necessary for contemporary society to function. As an introduction to blockchain technology, smart contracts serve a critical role in making transactions safer and more secure and functioning in an orderly manner. Not only that, but they make other components, such as programs operating on various platforms, more accessible. Let’s understand more about what are smart contracts and how they help.
Smart contracts are programs that are executed when specific conditions are met. They are stored on a blockchain and are normally used to automate the implementation of an agreement so that all participants can be immediately confident of the conclusion, without any intermediary’s participation or loss of time. They can also automate a workflow by activating the next activity when certain circumstances are satisfied.
Benefits of Smart Contracts
1. Speed, Efficiency, and Accuracy
When a condition is satisfied, the contract is instantly executed. Because smart contracts are digital and automated, there is no paperwork. This means, no time is lost in fixing errors that usually arise when filling out forms manually.
2. Trust and Transparency
There is no need to fear of information getting altered for personal advantage because no third party is engaged, and encrypted records of transactions are transferred between participants.
Blockchain records are encrypted, making them extremely difficult to hack. Moreover, because each record is tied to the previous and subsequent entry on the ledger, hackers would have to alter the entire chain to change a single record.
Smart contracts eliminate the need for middlemen to complete transactions. They also bring down associated time delays and expenses.
How Do Smart Contracts Work?
Smart contracts function by executing simple “if/when/then” sentences that are contained in blockchain code. When certain conditions are satisfied and confirmed, a network of computers performs tasks and the blockchain gets updated when a transaction is done. This means the transaction cannot be modified, and only authorized people can access the outcomes. Participants must identify how transactions and associated data are represented on the blockchain, agree on the “if/when/then” rules that govern those transactions, investigate all possible exceptions and design a process to resolve disputes in order to set the terms. Once all this is done, a developer can code the smart contract.
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Types of Smart Contracts
What are the different types of smart contracts? Let’s explore.
1. Smart Legal Contracts
These contracts are legally binding and the parties are obliged to fulfill their contractual commitments. If they fail to comply, they can face legal consequences.
2. Decentralized Autonomous Organizations (DAO)
The smart contract serves as the Decentralized Autonomous Organization’s (DAO’s) backbone. The contract is bound by particular rules that are incorporated into blockchain contracts and combined with governance systems. It offers a wide range of use cases that span from simple to sophisticated depending on the number of stakeholders. In addition, each action done by community members is replaced with a self-enforcing code.
3. Application Logic Contracts (ALC)
Application Logic Contracts (ALCs) are yet another sort of smart contract on Blockchain. It allows devices to run safely and independently and provides higher automation, lower transaction costs, and scalability. These contracts include application-based code generally in sync with other blockchain contracts. It also enables communication between Internet of Things (IoT) devices and blockchain technology.
Challenges with the Widespread Adoption of Smart Contracts
1. Learning Curve
Lawyers must learn to develop computable code, and courts must learn to read it or rely on expert witnesses to attest to correct interpretations. Understanding smart contracts come with a learning curve and it will take time for society to acclimate to it.
2. The Reality of Legal & Regulatory Environments
Regulations are one of the most minor automated aspects of the corporate environment. Smart contracts may be the catalyst for addressing this fact, but they will need legislative approval to do so, especially given the different requirements across nations.
There are other techniques to codify agreements that are widely in use. Similarly, peer-to-peer lending through Software-as-a-Service (SaaS) marketplace providers is more developed and increasing rapidly.
4. Governance Issues
The government needs to figure out ways to regulate smart contracts or tax the transactions of smart contracts, and new equilibriums should be developed when diverse regulation and tax rates are distributed globally.
5. Execution Speed
The majority of blockchain consensus techniques support sequential (chronologically ordered) transaction processing. Because parallel processing is not enabled, the procedure slows down the blockchain, with the danger of nodes failing to complete calculations on time. Transactions are then voided and the system is left ‘worthless’. This difficulty is being addressed by a variety of freshly developed blockchains—such as Solana, Ethereum 2.0, and others—that can match the transaction processing of traditional banks.
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Smart Contracts Examples
Enhancing a Digital Marketing Campaign
Smart contracts have the potential to assist marketers and publishers in developing solid connections. A smart contract might incorporate conditions requiring a publisher to meet preset goals. When an oracle (a type of smart contract) certifies that the publishers have done what they were expected to, the smart contract activates a payment to them. A clause, for example, requires a social media account with a large number of followers to promote a discount code. After 100 valid transactions using the code, the owner of that social media account earns cash.
Create the Finest Possible Client Experience
Smart contracts have the potential to strengthen Business-to-Consumer (B2C) relationships in real time. For example, if a shoe manufacturer partners with a streaming music service, the consumer will receive free membership time if they construct a playlist to listen to while jogging. A smart contract offers the buyer a discount offer on new shoes or suggests music with a similar pace to add to the playlist. It has the potential to raise consumer expectations by assisting runners who like listening to music and measuring their health.
Smart Contracts Use Cases and Applications
Smart contract use cases, in practice, differ depending on where organizations are implementing them. Let’s have a look at what these are:
Mortgages and Loans
Smart contracts can aid in the improvement of financial services such as mortgages and loans. As a result, it can link the parties and guarantee that the entire process runs well. Another advantage of implementing smart contracts in financial services is that all parties involved have visibility.
A smart contract database can be used to store information as well as to digitize physical assets. You can use a smart contract database for record storage and refresh and release them according to the stated settings. All of this can be automated. This is an example of a smart contract in action.
Smart contracts aid in automating government services. This is where it can assist the government in managing operations. One of these activities is ‘land title recording’ which the government utilizes to transfer property. Also, employing smart contracts will cut auditing expenses and promote the system’s openness.
- Be prepared for errors
- Test contracts thoroughly before rolling out
- Keep the contracts simple
- Keep updating the library
- Understand blockchain characteristics
List of Smart Contract Platforms
Explore a Career in Blockchain
Blockchain smart contracts are critical to our economy because they can offer the automation required for decentralized platforms. They provide a novel approach to issue resolution in areas such as escrow, clinical trials, insurance, and government procedures among others. You can learn more about blockchain and its technology by exploring these online courses offered by Emeritus, in collaboration with top global universities.
By Siddhesh Shinde
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