Blockchain technology, together with smart contracts, is changing the world around us, offering better security, transparency, and speed.
Decentralized applications (dApps) use smart contracts as their backend – in other words, smart contracts allow dApps to authorize users to perform sensitive operations and connect to the blockchain.
These two technologies were considered the same thing for a very long time because they both work on the Ethereum blockchain.
Speaking of which, Ethereum facilitates smart contracts owing to its native runtime environment, called the Ethereum Virtual Machine (EVM), which uses a distributed ledger for maintaining databases. Anyone can use smart contracts if they have Ethereum’s native token, Ether, to pay for the gas fees.
Smart contracts have the potential to revolutionize the way we do business and interact with one another worldwide. They can simplify or eliminate work-related tasks to enhance the efficiency of business processes, reduce expenses, cut out the financial intermediaries, and, last but not least, better align business interests.
A smart contract is managed by an Ethereum account, so it has a balance and can be the target of transactions. ERC-20 tokens are the basis for smart contracts, so you should buy no matter what is the price of Ethereum. Of course, there’s no need to track ownership of every token in your possession.
What Are Smart Contracts, Exactly?
As the name clearly suggests, smart contracts are codes or programs written in Rust, Python, or Solidity for specific contracts via the blockchain. The primary difference between smart contracts and regular contracts is that smart contracts make the deal impossible unless all terms and conditions are fulfilled.
They’re based on an if-then logic, meaning that if one group’s needs are met, the agreement can be adhered to, and the contract is considered complete.
Solidity supports the creation of smart contracts that are more sophisticated than the simple if-then model, and their potential goes beyond the simple transfer of assets. With a visual programming tool, it’s possible to build smart contracts without writing code in a programming language.
Smart contracts are self-executing contracts in which the terms of the agreement are directly written or translated into code rules, thereby decreasing the risks of error. Simply put, the code represents various conditional statements that describe the possible scenarios of a future transaction.
Smart contracts can result in the exchange of money, the delivery of services, or the unlocking of content protected by digital rights management. Due to the fact that smart contracts are automated, no paperwork is necessary.
There’s no need to worry about information being tampered with because the agreements are immutable, meaning that once the bit of code is deployed, it can’t ever be changed.
Some Examples of Smart Contract Uses
At present, smart contracts are deployed in various industries. To illustrate, they can be used in finance to manage fees and penalties; the firm, or even a regulator, is notified in case the service falls below the prescribed level.
Unfortunately, many professionals don’t grasp the wealth of use cases smart contracts have, so we’ll take a quick look at how these agreements can be used in finance, real estate, legal, and more.
As mentioned previously, smart contracts run on the Ethereum blockchain that can be used as a decentralized storage system to maintain confidentiality. Only the smart contract can read, write, modify, and delete data.
Information is stored in the shape of key-value pairs, where the key can be a string or byte, so it can’t be changed. One of the reasons why blockchain technology enjoys massive popularity is that it prevents anyone from deleting and changing a record once it’s been created.
The immutability of smart contracts is a blessing because the performance of the agreement is guaranteed to take place in a similar manner in which it’s coded.
Smart contracts enable multiple signers to review and agree on an action on the blockchain before the action is executed. To be more precise, the funds are transferred from the account only when a specific number of users agree.
This is useful for protecting assets and guaranteeing that certain actions occur in conformity with the wishes of the owner or the majority of owners. Multi-signature smart contracts can be used by companies, organizations, and partners to avoid a single point of failure as opposed to simply using one wallet.
The minimal number of participants that must agree for the action to be approved is called a threshold; each participant has their own public key.
Businesses deploy original creative work in their day-to-day activities. For instance, they may create images or videos for their websites, packaging, marketing literature, or catalogs. That work can be protected by copyright, a type of intellectual property that preserves original works of authorship for a fixed number of years.
A business can license others to use its works; the license agreement should be in writing and, above all, professionally drafted. A smart contract can be used to protect intellectual property rights.
It’s enforceable under the law, so the agreement between the two parties represents a natural extension of the legal enforcement realm.
Can Smart Contracts Be Legally Binding?
Since smart contracts are new constructs, their role is still to be determined. They can be legally enforceable provided they meet the legal requirements of a contract, yet these prerequisites vary from one jurisdiction to the other.
If the code is the law, there can be no legal disputes over the terms of the agreement, meaning that all parties are bound by the automatic performance of the contract.
Solid smart contracts have prohibitive costs of revocation and modification, while weak smart contracts don’t. In other words, if the smart contract can be altered following its execution, it’s considered weak.
All in all, smart contracts are capable of forming binding agreements that are upheld under the law, which represents a considerable development in terms of certainty.
If the performance of the smart contract is affected by an event external to the code, like system failure, the court is capable of solving the dispute, but the interpretation might not be reliable.