What are Smart Contracts? A Guide for Beginners

By April 28, 2021Ethereum
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smart contracts explained

For most people, smart contracts have been as confusing as the blockchain. However, just like blockchain, it is easy to understand them, provided you have the correct information. You have probably interacted with a contract at some point.

A reminder of what a contract is will go a long way in helping you understand what smart contracts are and how they work. A contract is a legal document designed to bind two parties in an agreement. A contract defines the duties of parties in the agreement and also governs their conduct.

Just like conventional contracts, smart contracts also comprise the four elements of valid contracts. That is an agreement, consideration, capacity, and intention.

Smart contracts were first proposed in 1994 by a computer scientist. However, the popularity of smart contracts boomed after the establishment of Ethereum. The computer scientist Nick Szabo realized that one could use a decentralized ledger for contracts. The contracts could eliminate the need for an intermediary. That is by being converted into a code and supervised by a computer system.

What are smart contracts?

They can be defined as blockchain-stored programs that run when certain conditions are met. Note the similarity they have with the conventional contracts; they occur when parties meet specific requirements.

The programs automate the execution of the contracts without the presence of an intermediary. That way, they address the issue of time loss usually experienced when intermediaries are involved. In smart contracts, the workflow is automatic, and the next course of action is triggered as long as the party meets a particular condition.

How do smart contracts work?

Remember that smart contracts are based on programming languages. They approve and execute a specific transaction when the parties meet the set conditions. If/when/then statements are written into the codes for the smart contracts to achieve this.

The conditions have to be predetermined for the contracts to work. For instance, a lender can award someone a certain amount of loan through smart contracts if they have achieved a particular credit score.

For instance, if a buyer wants to get a car online through a smart contract, you will avoid communicating with sellers or trusting a company or an individual; that way, it is hard to get scammed.

The network of computers will do everything for you. Funds will be released to the seller if they meet the predetermined conditions. They will also register the car and issue you with a ticket. In the whole process, you don’t have to interact with an intermediary or trust them to complete your purchase.

Examples of ways smart contracts are used

You can use smart contracts across several industries, be it finance or even healthcare.

1. Healthcare

Contracts in healthcare go a long way in reducing costs and mitigating risks. They also ensure compliance and help practitioners provide the best care to their patients. The increase in the number of people seeking healthcare has caused a strain on most healthcare providers as they have to deal with large amounts of data.

Managing patient data, records, and information has become an enormous challenge, leading to vulnerability and fraud in the industry. Smart contracts have stepped in to address the challenges.

Smart contracts have been instrumental in addressing inefficiencies witnessed in health insurance. Patients buying health insurance through smart contracts are guaranteed safety. More so, they are saved from the tedious processes involved with filing insurance claims. Smart contracts will automatically be executed when the patients undergo procedures using their insurance.

Smart contracts will also go a long way in supporting the management of health records. They are on a digital ledger, which is moved easily from one hospital to another. The information can be transferred from one practitioner to another, even in the same hospital.

2. Real estate

The use of smart contracts in real estate will make transactions cheaper. For instance, if you want to sell a home, you will not need to pay a middle man to list or advertise it. Smart contracts can help you set agreements and rules that will govern your transactions.

Conditions will be transparent, and an intermediary will not be there to manipulate information. You will get real-time updates when a down payment is made. When it comes to real estate management, the system will make payments when inspections and repairs are done on the home.

The process of transferring property to a buyer will be made significantly short. The fantastic part is that the buyer and the seller do not even have to meet face to face. Smart contracts are applied in the supply chain. Governments, the automobile industry, and management in companies are using smart contracts.

What are the benefits of smart contracts?

People, governments, and companies are turning to smart contracts for several reasons.

1. They are self-governing

When there is autonomy in transactions, there is a significant reduction in operation costs and elimination of the possibility of manipulation. This is one of the things that make smart contracts attractive.

There is no need to involve brokers, lawyers, or any other intermediaries to confirm transactions. Autonomy also plays a significant role in enhancing trust in the transactions. The absence of intermediaries cultivates confidence among the parties in the contract.

2. Speed and efficiency

Speed and efficiency will go a long way in addressing most healthcare and real estate industry challenges. When it comes to healthcare, patients can avoid the tedious process of applying for claims as transactions occur when the parties meet the set conditions.

Since there is no paperwork, there will be no issue of errors, which are also known to slow down transactions.

3. Security

Traditional contracts are prone to hackers and other security issues like theft and loss. Blockchain transactions lock out hackers and intruders due to encryption. They are also secure from manipulation by third parties.

Since all transactions are on a digital ledger, it is difficult for users to lose data.

4. Savings

Whether it is banks, brokers, or lawyers, intermediaries have cost implications. Smart contracts do not need intermediaries. Thus, parties save money by avoiding the fees.

Take away

You can use smart contracts across a wide range of industries. While their nature may vary, they come with the same benefits. That is trust, transparency, cost savings, speed, and security. Blockchain is the future of contracts, and its impact is already felt in the supply chain.

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