Smart Contracts Explained:

What is a Smart Contract?

A normal contract is a legally enforceable agreement between separate parties that states and governs the mutual rights and obligations of all signed parties. A contract will normally involve the transfer between parties of goods, services or money.

A Smart Contract performs much the same function as a normal contract, but it is in a different format. Rather than being on a piece of paper it is in digital format, and rather than being composed of written words, it is composed of computer code.

Smart Contracts are self-executing programmable contracts that represent an agreement between two or more parties. In a Smart Contract, the terms and conditions applicable to a transaction are written in code and distributed across a decentralized blockchain network system.

Smart Contracts have been described as tiny computer programs stored inside a decentralized blockchain network, or put another way, Smart Contracts are the building blocks you use in order to create decentralized applications.

A Smart Contract is a piece of software that stores rules for negotiating the terms of an agreement (made between anonymous parties,) and automatically verifies fulfillment and then executes the agreed terms.

Smart Contracts comprise simple if/when and then statements in the form of computer code stored on a blockchain. Once predetermined conditions are met and verified, a network of separate computers executes the actions written into the contract.

Smart Contracts activate automatically and enable disparate, anonymous parties to carry out transactions without the need for a central authority, a legal system, or the involvement of any third party.

Put another way, a Smart Contract removes dependency on a third party and allows all parties involved in the agreement to transact directly with each other. The removal of third-party involvement in the transaction process is a major reason why large enterprises are making a shift towards Smart Contracts.

Smart Contracts are automated, trackable, and irreversible, meaning once activated, contract participants are immediately sure of a predetermined outcome.

Smart Contracts are also used to automate a workflow by acting as a trigger for the following action in a predetermined sequence of actions.

How Smart Contracts Work:

Nick Szabo an American computer scientist first proposed the concept of Smart Contracts in 1994. Szabo defined Smart Contracts as “computerized transaction protocols that execute terms of a contract.”

Lucas Mearian a Senior Reporter for Computerworld, describes Smart Contracts as “one of the most useful tools associated with blockchain,” because they enable the transfer of everything from crypto and fiat currencies through to physical goods transported around the world.

Smart Contracts sit between supporters and creators. Take for example a Smart Contract that deals with fundraising. Typically, there will be four procedural steps stipulated in any (Fund Raising) Smart Contract.

Step 1: The Smart Contract is programed so that it holds all received funds until a certain amount/level is reached.

Step 2: Once the defined amount/level is reached, the project supporters transfer their money to the Smart Contract.

Step 3: If the project gets fully funded, the Smart Contract then automatically passes the money to the creator of the project.

Step 4: If the project fails to get fully funded within a period of time stipulated in the Smart Contract, the money automatically goes back to the supporters.

The Different Types of Smart Contracts:

1: Smart Legal Contracts

There are three forms of Smart Legal Contract and these are the Natural Language Contract, the Hybrid Contract, and the Code only Contract.

A Smart Natural Language Contract is one in which the contractual terms and conditions are stated in natural language but performed automatically by computer code. This is the most commonly used type of Smart Legal Contract.

A Smart Hybrid Contract. A hybrid Smart Contract is one that contains both natural language and computer code.

A Code Only Smart Contract. As the name suggests this type of Legal Smart Contract is composed solely of computer code. All the contractual terms and conditions are represented by code as are any automatically performed actions.

Code Only Smart Legal Contracts are rare because code cannot adequately express the nuances or intricacies of a typical legal contract.

Smart Legal Contracts normally occur in areas such as finance, international trade, and real estate and they serve to simplify the legal process and ensure compliance to regulatory guidelines.

2. Decentralized Autonomous Organizations (DAOs)

A Decentralized Autonomous Organization contract also referred to as a (DAO) is a Smart Contract built specifically for blockchain communities. The DAO Smart Contracts state the agreed upon terms and conditions that blockchain communities must abide by.

3. Application Logic Contracts (ALCs)

Application Logic Contracts are a small piece of every Smart Contract and they function under a managing program. ALC’s are composed of application-specific code that works in combination with other code on the blockchain. An ALC helps start and authenticate communication between IoT mechanisms. An loT is a system of devices or things that connect to each other and/or the Internet through a network (such as a blockchain network).

What blockchains Support Smart Contracts?

There are a number of blockchains that support Smart Contracts but the largest is Ethereum. Ethereum was specifically created and designed to support Smart Contracts. Smart Contracts are programmed in the Ethereum using a special programming language called Solidity. Solidity was specifically created for Ethereum and uses a syntax that resembles Javascript.

Bitcoin also has support for Smart Contracts although it’s a lot more limited compared to Ethereum.
Another blockchain platform that enables the development of Smart Contracts is NXT. NXT allows users to build Smart Contracts through utilizing ready-to-use templates.

Sila is a platform that offers Application Program Interfaces (API’s) that integrate real world payments functions and digital payment functions. The Sila API and Software Development Kits (SDK’s) make it easy to store value and transfer money between different bank accounts and crypto wallets. Creating a Smart Contract on Sila is as simple as putting in the assets then requesting the code to automatically execute the delivery of assets.

Advantages of Smart Contracts:

Because Smart Contracts are stored on a blockchain they have many advantages.

1: Compliance and Control. Smart Contracts are designed so that compliance and control happen automatically without the involvement of any intermediaries or third-parties. Smart Contracts are also independent and self-executing.

2: Self Verifying. Smart Contracts are self-verifying because they automatically source data from external sources.

3: Immutable. Smart Contracts are immutable which means that once a Smart Contract is created it can never be altered or changed. In other words, no one can tamper or change the code of a Smart Contract.

4: Distributed across a network. Smart Contracts are distributed across a network which means they can also be validated by everyone with access to the network.

The distribution of a Smart Contract contents ensures that no single person can tamper with the contract or force the contract to release the funds. Should anyone try to force the release of funds, other people on the network will spot the attempt and mark it as invalid.

5: Autonomy and cost reduction. Smart Contracts are automated and are applicable to a peer-to-peer transaction. Smart Contracts eliminate the need for third parties and therefore negate any influence a third-party may have.
By eliminating the need for third-party intermediaries, the Smart Contract results in significant cost savings for all parties involved in a transaction.

6: Duplication/Backup. Smart Contracts are stored on the blockchain which means they are duplicated many times and are easily restored should any data be lost.

7: Greater Security: Immutability, the distribution of content across a network of users, the encryption of information, and the lack of third-party involvement, all combine to create a greater level of security. Plus information contained within a Smart Contract remains in the blockchain and can be easily accessed if need be at any time in the future.

8: Saves Time and Money. Through utilizing computer protocols to complete certain tasks, Smart Contracts increase efficiency and reduce the time spent conducting various business processes. In short, Smart Contracts facilitate faster resolution than a manual process which means they save time for all parties involved.

9: Accuracy. Using Smart Contracts means eliminating the manual filing of certain forms and this in turn means a much higher level of accuracy than normal contracts in the real world.

10: Trustworthy and Transparent. All information inside a Smart Contract is encrypted and distributed across a network of users and this ensures the information is transparent and can be trusted.

11: No Third-party Mediators. When utilizing a Smart Contract, parties eliminate any need for third party mediators at the time of settlement.

12: Ideal for High-end Contracts. All Smart Contracts are verified by cryptographic digital signatures which makes them the perfect choice for high-end contracts.

What Can Smart Contracts be Used for?

Government: One area where Smart Contracts are proving particularly useful is Government. The approval process for traditional Government contracts, will often be mired by bureaucratic layers which means it can be complicated and time consuming. For example, the traditional approval process can be delayed and complicated by things as simple as a broken printer, missed faxes, or missed mailed copies.

The creation of Smart Contracts involves a much more streamlined approval process because the approval chain is programmed directly into the Smart Contract.

Upon receiving the Smart Contract, signees can approve or upload any extra/contingency documentation that may be needed. For example, signees can upload any supporting documents, images, graphics, or blueprints directly from the Contract.

A single Smart Contract contains all the information that would otherwise be contained in separate documents. For example, rather than a chain of emails or multiple copies of a document, verified parties can access the Smart Contract at any time and get up to date and accurate status information.

Banking: One of the most complicated and at the same time one of the most common contracts are mortgage contracts offered by banks.

Banks can use Smart Contracts to issue loans or to offer automatic payments. For example, a Smart Contract can be used to define, record and state the terms and conditions of a mortgage loan.

Mortgage loans will often seem complicated and confusing because they are composed by experts, but read by normal citizens who have little idea of the intricacies involved in a mortgage loan.

Smart Contracts simplify the mortgage loan agreement, making it easier for the normal citizen to understand. For example, some contracts specify that before a sale can be completed the property must be inspected and must have specific types of insurance coverage, (flood and fire insurance are two examples).

Using a Smart Contract quickens the mortgage sale process. For example, a seller may waive the need for inspection and when the buyers obtain insurance, the insurance provider can give proof of purchase to the bank all via a single Smart Contract.

When multiple parties are involved in purchasing a property, the Smart Contract helps make the process less confusing and faster. The Smart Contract provides real-time status and notifies everyone involved when each stage is complete.

Insurance: Insurance companies can use Smart Contracts to hasten the processing of claims. For example, a Smart Contract can be used to help process an auto insurance claim. If an insured driver is involved in an accident the Smart Contract can immediately inform both the driver and the insurance company of the terms and conditions, applicable to the claim.

The police report, photographic evidence, insurance details for both parties and written statements can all be uploaded onto the Smart Contract. In effect Smart Contracts increase the efficiency of the claims process.

The Smart Contract becomes a solitary source of truth that can be referred to all parties concerned in the insurance claims. The Smart Contract is also accurate and can serve as a source of reference when disputes arise.

The Smart Contract offers numerous logistical advantages but perhaps the most valuable benefit derived from Smart Contracts is peace of mind. Knowing that all the details of an accident are contained in one place and cannot be changed equals peace of mind for the insured parties and the insurance companies.

Taxation: Smart Contracts have many benefits that make them perfect to be adopted by taxation departments. For example, they allow immutable transactions and they have permissioned ledgers which offer greater security, privacy and confidentiality. Smart Contracts also enable automation and increased collaboration through offering greater levels of trust and transparency. Smart Contracts reduce the cost of taxation compliance, reduce revenue leakages, and minimize the exploitation of tax exemptions.

Lastly and perhaps most importantly a Smart Contract can be used to allow multiple entities to securely and concurrently share data in real time.

Digital Identity: A Smart Contract offers many advantages when used as a form of digital identification. For example, it is more secure because it is on a decentralized and immutable blockchain network, plus it delivers more secure identity verification.

Because Smart Contracts are self-executing and information can be exchanged without interference from third parties, this means they offer a much greater level of privacy than non-digital identification systems.

Using Smart Contracts for identification purposes can increase accessibility to goods, services, and organizations. Digital ID on Smart Contracts can also be used to conduct and verify transactions, for opening bank accounts, E-commerce shopping, as evidence for background checks, proof of ID for credit card purchases, opening bank accounts, and the date of travel for immigration purposes.

Lastly, on a purely functional level, Digital ID’s replace paperwork and will never be damaged or lost

Real Estate and Land Titles Recording: Smart Contracts have many advantages for the real estate industry and some people have even predicted they will revolutionize the entire industry. For example, Smart Contracts connect purchasers and sellers more quickly and directly than ever before, plus they facilitate quicker property listing.

Smart Contracts eliminate the need for brokers, lawyers or banks and they improve market liquidity, perform the functions of a listing agent, act as a payment broker and as a legal documenter.

Lastly, by cutting out third-party intermediaries, Smart Contracts can significantly reduce the financial cost of doing real estate transactions.

Supply Chain: Smart Contracts have a wide variety of uses in the supply chain, including the following:

Releasing Payment:  A Smart Contract can be used to automatically release payment, providing certain contractual requirements are met. For example, a manufacturer and a supplier can create digital wallets and Smart Contracts which then facilitate a transaction between the two.

Put another way, the digital wallet together with the Smart Contract provides a means for the manufacturer to pay the supplier when purchasing the goods. The payment is in the form of cryptocurrency and the Smart Contract automatically moves crypto funds from manufacturers digital wallet to the suppliers’ digital wallet.

Recording Ledger Entries: Smart Contracts can be designed to record a specific event when it does or does not occur. For example, if an IoT- enabled device is used to monitor the shipment of goods and detects the unauthorized opening of a container, a Smart Contract can automatically record this information. This is a particularly useful feature for products such as pharmaceuticals which require intense scrutiny when being transported.

Flagging a Need for Manual Intervention: Smart Contracts can also be used to notify parties when a situation that requires manual intervention occurs. For example, a Smart Contract connected to temperature monitors could alert parties if an extreme temperature occurs. Once notified the concerned parties can take appropriate action and save themselves significant amounts of money. This is particularly important for temperature sensitive products.

Gaming and Gambling: An essential component of any casino success is a base of trust. Put simply, to survive a casino must have the trust of its gambling customers. Smart Contracts can be designed to hold and display a games historical data. When the historical data is made available to the gamblers, they can use it to decide if a game is fair and true.

In other words a Smart Contract by displaying a games historical data can help build trust in the game and the casino.

A Smart Contract cryptically secures the payout ratio and stops a casino from altering the ratio displayed.
The Smart Contracts when applied to gambling and gaming run on a predefined code of if and then options. For example, when a gambler using Ethereum plays roulette and bets on the color black, and the ball lands on the color black, the “if” code applies. The code then automatically returns the gambler’s winnings to his or her private digital wallet and this involves the “when” code.

The if and when code can be applied to any online gambling sector including fixed betting odds, peer-to-peer betting, heads or tails and most card games.

Through utilizing Smart Contracts an online casino can operate in a secure and transparent way which will gain gamblers trust and earn respect from the gaming community.

Smart Contracts can also be used by postal companies for payment on delivery and by pharmaceutical companies for the transportation of critical medicines.

Links of Interest

Smart Contracts Can Enable Automation

Can Smart Contracts Revolutionize Real Estate?

The Future of Online Gambling Ethereum Smart Contracts