Getting smart about smart contracts- all you need to know about smart contracts, served to you right at your fingertips! 📃
‘Smart contract’ defined
A smart contract is a program stored on a blockchain that functions when specific pre-requisite conditions are fulfilled.
How do smart contracts work?
Smart contracts function primarily on computer programs that resemble your average coding statements. All contracts have specific terms that need to be determined by the relevant parties before acting upon them. Once the parties establish the terms of the agreement, the terms are then transformed into a code.
What does the code essentially do? Simple. It just represents a certain number of various conditional statements that lay down the possible outlines for future transactions.
Think of them as your elementary ‘if this…then that’ statements that you used in your middle school computer classes!
The code is then saved on the blockchain and distributed among all the participants concerned with the transaction. This is done to make the entire process as transparent as possible - All the participants have access to the same information at the same time, leaving no room for any sort of manipulation! (Unlike the problematic characters in The Vampire Diaries🧛)
Once all of the parties agree to the contents of the code and verify it, the necessary transaction is then implemented.
Smart contracts vs. Traditional contracts
In essence, smart contracts are software applications that automate the application of rules. On the contrary, traditional contracts are agreements drafted in clear, everyday language and supported by legal obligations.
In what ways are smart contracts different from traditional contracts?
Let’s get down to it.
- Need for third party entities: Smart contracts have evaded the need for any third-party entity to enter a contract. On the other hand, your traditional contracts still require you to visit a lawyer to overlook the agreement.
- Cost factor: Smart contracts are cost-effective. Since they are autonomous and happen within seconds, they seldom cost a very meager amount. Of course, the cost may vary according to many factors, but they are still much cheaper than traditional contracts! Enforcement of traditional contracts is not only a cumbersome process, but it also bears the weight of being budget-unfriendly. :/
- Kind of signature required: All contracts need to be signed by the respective parties to harbor evidence and trust. The only difference between signatures on smart contracts and those on traditional contracts is that while the former requires a digital signature, the latter requires the old-fashioned wet signature. (the signature you have been practicing on the back of your notebooks since you were nearly ten! 🖊️)
- Type of payment method: Smart contracts function by way of automated payments. What this essentially means is that all payments required- including commissions, are automated and hence done instantly. On the other hand, traditional contracts are implemented through manual, physical payments.
Oracle’s Contribution
‘Oracle’ defined
Oracles are independent structures that link smart contracts on blockchain networks to external systems of the real world.
How Oracle allows smart contracts to work
Oracles provide a way for systems on the web3 space to access already existing databases of the physical world.
But why would smart contracts need information from the real world anyway?
Let’s take an example to understand this better.
For instance, smart contracts could need information on real estate. Oracles could be used by applications that utilize smart contracts to access the data source and request specific data. The oracles would then simply need to link the blockchain interface to the market data and the data source!
Oracles function as links between smart contracts and the real world. They help transmit the necessary data, thereby making smart contracts more efficient in their execution.
How do they do this?
Let’s take an example to understand this better - Chain Link.
Oracles can function as links between smart contracts and the real world by way of multiple services, and one of them is Chain Link. Chain Link is a type of technology that links smart contracts based on blockchain technology to external data.
Chain link supports what it refers to, as hybrid smart contracts by using blockchain technology to securely permit computations, both on and off-chain.
Businesses can access any significant blockchain network, including Ethereum and Solana, using Oracles.
Think of a chain link as a middleman between smart contracts and external data- while oracles are the technology that links the two; chain link is the real G making it work.
Use Cases of smart contracts
Smart contracts have a wide range of applications because of their security and dependability. Some of its uses include:
Trade Finance
Smart contracts can enhance transparency in trade transactions, ensure data authenticity, reduce the likelihood of errors or fraud, and facilitate fund transfer among parties engaged in open account trading.
Financial Services
Smart contracts can be used to manage fees or penalties under a services agreement, in addition to monitoring service standards under contracts with financial services companies. They can step things up in the financial sector!
Loans and Mortgages
The mortgage sector requires a radical revamp. Right now, it's overloaded with expensive third parties and drawn-out procedures. Lenders and borrowers can agree to precise terms and conditions thanks to smart contracts. Additionally, they can verify mortgage transactions without the aid of attorneys or other third parties.
Insurance
The insurance industry is plagued with conflicts. Given this, smart contracts have a crucial role to play in automating procedures and offerings in the insurance sector. Reduced costs may result from this, as insurer costs are reduced. Policyholders can get payments quicker than ever, thanks to automated claims payment systems supported by smart contract technology.
Nearly Done!
Smart contracts have massive potential to revolutionize how parties interact with each other in the future. While they still have to evolve to be widely accepted across various industries, enterprises are gradually incorporating them into multiple fields. Although smart contracts are already running the show, it’s also essential to integrate new standards to better serve our needs.
Together, let’s hope for a self-reliant and completely transparent future with smart contracts!
Now that we've covered our basics, let's move on to the Mean Girls of the web3 space, the ever-famous Bitcoin and Ethereum coins!