What are smart contracts in a blockchain?

Smart contracts

Contracts are binding agreements between two or more parties that create mutual obligations enforceable by the law. In the same way, smart contracts are binding agreements contained in a computer program (codes) that runs on the Ethereum blockchain. This means that smart contracts are stored on the blockchain network and are immutable.

The computer program is automatically executed when the stipulated conditions are met. This eliminates the need for intermediaries such as banks, government agencies, and so on. There are no restrictions on using smart contracts as long as the system used is built on a blockchain. Smart contracts are applied in various industries such as real estate, healthcare, crowdfunding, voting, and so on.

The need for smart contracts

Smart contracts are self-executed and are, therefore, the building blocks for digital markets. Once a contract is written on the Ethereum blockchain, it is immutable and shared across the network. This eliminates fraud and ensures a transparent system of transactions or value exchange across the network. Smart contracts cannot be hacked because the transaction records are encrypted. The time delays and fees associated with intermediaries are also reduced when a smart contract is executed since no intermediaries are required. As a result, business transactions or any other value exchanges are expedited.

Smart contracts also ensure transactional accuracy, speed, and efficiency across the blockchain network. This is because there is no paperwork to deal with and no manual errors in documentation.

How do smart contracts work

Smart contracts are developed using Ethereum's main language, Solidity. The first-ever executed smart contract was developed on the Ethereum blockchain. Many smart contract platforms exist, but the most popular and commonly used is the Ethereum blockchain. However, not all blockchain networks support smart contracts.

The binding rules of the transactions are spelled out. The developer then codes these rules in Solidity. The coded binding rules, which are now a smart contract, are pushed to the Ethereum blockchain. The Ethereum virtual machine automatically executes the smart contract once the transaction's binding rules are met. The anonymous participants in the smart contract provide a digital signature confirming their ownership of the asset involved in the smart contract. For example, in the real estate industry, the smart contract's binding rules can be the following:

"On the first day of every month, an agreed amount of money, say 300 ether, is moved from a tenant's wallet to the landlord's wallet."

Example

To further illustrate how smart contracts work, let's consider its use case in real estate:

Explanation

We have Bob, the house seller, and John, the buyer. Bob first digitizes his house on the blockchain network. Then both parties enter into a smart contract. That is to say that Bob and John agree on the terms and conditions to be stipulated in the contract. An example of such stipulated conditions could be the following:

"John's payment for the house would be released to Bob only if John receives a copy of the house ownership from Bob."

This stipulated condition is then written in a computer code using Solidity and stored on the blockchain network, making the contract smart and immutable.

The Ethereum Virtual Machine (EVM) executes the smart contract by locking up John's payment in his wallet. When Bob sends a copy of the house's ownership to John over the blockchain network, the nodes of the network validate and confirm this transfer. Then, the smart contract is triggered and executed by the EVM. Thus, John's wallet is initialized, and his payment for the house is released to Bob.

Conclusion

We live in the age of disruptive technology, and smart contracts are one such technology. Although smart contracts are still in their early stages of development and adoption, they have significantly improved the digital market. We're getting closer to a future where smart contracts will be used to execute almost every business deal. As a result, business transactions and deals would be more efficient, transparent, and secure. However, this would have ramifications for intermediaries such as brokers, bankers, lawyers, and so on. Their services will no longer be required as usual. This could result in the loss of their jobs.