One of the biggest problems of modern business is trust. To solve this problem, we often depend on third-party intermediaries but that also demands a certain level of trust. This is where blockchain becomes handy. However, to fully grasp the concept blockchain technology, it is important to understand what smart contracts are and their role. TEO-the energy origin explains in 2 minutes their definition and usage.
Definition
Smart contracts are basic programs stored on blockchain that run automatically when predetermined conditions are met. In other terms, smart contracts execute a specific action by following simple “if/when…then…” statements that are written into code on a Blockchain. If you need the definition of Blockchain, read our previous note here.
Why do we use smart contracts?
Smart contracts can have multiple purposes. These actions could include releasing funds to the appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. The blockchain is then updated when the transaction is completed. More generally, they are typically used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss.
Let's take an example. Let’s say I am a landlord wanting to lease an apartment to you. A smart contract can be set up to send you the code of a box containing the keys of the apartment only when you have sent me the deposit money. If the amount of money you sent me is not equal to the total value of the required deposit, the smart contract won’t be able to validate the execution of the agreement and won’t send you the code to get the key.
One famous application of smart contracts is regarding the creation, transfer, sale, trade of digital assets called tokens.
What are the benefits of smart contracts?
The terms of the smart contracts are passed to the blockchain, where the interesting parties can see them, and understand the conditions in a transparent way. Once deployed onto a blockchain:
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smart contracts can’t be altered as soon as they are deployed. This ensures that they can’t be censored or shut down.
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It reduces the need for trusted 3rd party to manage the contracts, validate its execution, allowing you to save time.
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The self-execution of smart contracts also allows minimum errors (that could have been caused by human intervention).
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As blockchain is a distributed ledger, all the network participants have a copy of the transactions, this limits the potential of security breach and fraud.
Smart contracts also have certain limits. Because Smart contracts are immutable, if the programmer of the smart contract includes voluntarily or not a bug, it is impossible to fix it once the contract is on Blockchain.
