A simple guide on Smart Contracts!
Have you ever wondered what smart contracts are? Have you asked yourself how smart contracts work in blockchain technology? If you answered yes, then your quest ends here!
Today, in this simple guide on smart contracts, we will define them, their possible benefits, and how they work.
What are smart contracts in blockchain technology?
Smart contracts in blockchain technology are programs executed when specific criteria are satisfied. These criteria involve a blockchain network and the contract’s code, which must be duplicated through many systems.
However, the Blockchain must maintain the smart contract to get to terms with the execution. In short, smart contracts work to initiate executions without the need for any third party.
Financial applications such as trading, investing, lending, and borrowing are smart contract applications. And many industries, including gaming, healthcare, real estate, and constructing entire company structures, can utilize these smart contracts.
We have been hearing Ethereum and smart contracts together more often. So how do both of them get together? Keep on reading to know that.
How Do Smart Contracts Work?
A smart contract is a business logic-encoding program that follows “if … then …” statements. This program can operate via Ethereum or Polkadot, for example. We have compiled them into quick steps to make them easier to understand.
Step 1: Initial Stage
The initial stage involves developers and business teams discussing the smart contract’s desired behavior. The specifications might also be based on responses to specific occasions or situations or even on the requirements and limitations of the Blockchain.
Step 2: Gathering Calculations
Now, the second step involves gathering all the numerical documentation. Again, it might range from simple events, including payment authorization, package receipt, reading thresholds, and much more.
Step 3: Complex Actions
This step requires carrying out the most complex actions. These include determining the value of a financial instrument or, at times, releasing an auto-insurance payout. In addition, using more advanced logic, you can encode these actions.
Step 4: Creation of Logic
At this stage, the logic is created and tested using a development tool for a smart contract. As soon as the process is done, it is sent to another team for further testing.
Step 5: Uploading of the Contract
Once authorized and secured, the contract is set out on a Blockchain. It can also be organized on other Blockchains.
Step 6: Updates from Oracle
At this stage, your smart contract is all set. Once deployed, the smart contract is set up to listen for updates of events from “Oracle.” The Oracle is a cryptographically secure streaming data source.
Step 7: Execution of Smart Contracts
In this final step, the smart contract executes. However, it’s pretty interesting that it only occurs when particular events combine from one or more oracles.
What are the Benefits of Using Smart Contracts?
Smart contracts have many benefits that might require us to dedicate a whole blog to them. However, to keep this short and to the point, we have explained some of the most prominent benefits of smart contracts.
Transparency and Trust
With smart contracts, you don’t have to worry about misusing information for personal gain. As no third party is involved, all transactions are secure. Moreover, encrypted transaction logs are exchanged among participants only, making them further secure.
Accuracy, Speed, and Efficiency
Another benefit of smart contracts is the hassle-free execution. So, the contract is immediately executed as soon as a condition is met because smart contracts are digital and automated. Thus, there is no paperwork to deal with and no time wasted compared to paper documents.
Safest Transactions
Because of the encryption, Blockchain transactions are a bit tricky to hack. Furthermore, it also has a proper link between the present and previous Blockchains. So, hackers might have to change the entire Blockchain to change a single record. In short, smart contracts are difficult to hack.
Savings
Smart contracts do not require the intervention of an intermediary; thus, they are fast and cost nothing.
Some Useful Applications of Smart Contracts
Smart contracts have a lot of applications in the world of digital finance. Here are a few examples of smart contracts:
Smart Contacts and Flight Insurance
The smart contract is connected to a database that tracks flight status. A delay of two hours or longer is a condition of the insurance policy; therefore, if the flight is delayed by more than two hours, the smart contract self-executes to repay you.
Increasing Trust in Retailer-Supplier Relationships
Arguments with the dealers are resolved using smart contracts on Blockchain by The Home Depot. What happens is that by taking advantage of real-life communication, they build stronger relationships with suppliers. Therefore, this provides better results for complex working situations and other innovations.
Limitations of Smart Contracts
Smart contracts can’t get information about real-world events since they can’t send HTTP queries.
It’s just way too complex to alter how smart contract operates. Due to this, it is expensive and time-consuming to fix any programming glitch.
Ethereum and Smart Contracts
Smart contracts usually refer to software operated on Blockchain, and most of the time, that Blockchain is Ethereum. Ethereum is a decentralized open-source blockchain with a smart contract function.
In simple words, smart contracts constitute several functions, codes, and other data. The Ethereum Blockchain single address is used to store all of this data. So, long story short, Ethereum can be used in the form of smart contracts.
Moreover, these transactions can also be transferred across some other networks. However, they are not controlled by a user; instead, they are deployed to the network and run according to a set of instructions.
Like conventional contracts, smart contracts also have some set rules. However, they are enforced through programming rather than paper-written instructions.
Final Thoughts
A smart contract is a very complex subject. This simple guide on smart contracts has only touched the tip of the iceberg. However, we have defined smart contracts, how smart contracts function, and their benefits. We encourage you to continue to learn and read more about smart contracts. Good luck with your venture!
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