What Are Smart Contracts?
By simple definition, smart contracts are programs that run when predetermined conditions are met and are stored within a blockchain. They are often used to automate the execution of a contract. In this way, all participants have the opportunity to reach the result immediately without the participation of any intermediary or loss of time. It automates a workflow by triggering the next action when previously agreed conditions are met.
Smart contracts are written in virtual language and have the power to execute autonomously based on a set of programmed parameters. It strengthens security, transparency and trust between signatories, prevents changes and eliminates the need for intermediaries.
Similar to traditional contracts, smart contracts define rules and penalties around a deal and automatically enforce those obligations. They can work independently and can be implemented with many smart contracts.
The integral components of a smart contract are called objects. There are basically three objects in a smart contract — signatories which are parties involved in smart contracts; ; the subject of the agreement or contract and specific terms.
Historical Background of Smart Contracts
To understand smart contracts, we can take a small look at the history of this concept. The term was first introduced by computer scientist and cryptographer Nick Szabo about 20 years ago when he was a graduate student at the University of Washington. Szabo states the term as follows:
New institutions and new ways of formalizing the relationships that make them up are now made possible by the digital revolution. I call these new contracts "smart" because they are so much more functional than their dull, paper-based ancestors. The use of artificial intelligence is not implied. A smart contract is a set of commitments specified in digital form, including protocols, by which the parties fulfill these commitments.
A 2018 academic study found that smart contracts may be smarter than paper contracts because they can automatically execute certain pre-programmed steps, but they shouldn't be seen as smart tools that can solve the more subjective requirements of a contract.
How Do Smart Contracts Work?
‘’Smart contracts operate by following simple “if/when... then…” statements written in code on a blockchain. A computer network executes actions when predetermined conditions are met and verified. These actions may include depositing money with the appropriate parties, registering a vehicle, sending a notice, or issuing a ticket. The blockchain is then updated when the transaction is complete. This means that the transaction cannot be changed and only the permitted parties can see the results.
First, the contracting parties must determine the terms of the contract. After the contract terms are finalized, they are translated into programming code. Basically, code represents a set of different conditional expressions that describe possible scenarios of a future operation.
When the code is generated, it is stored on the blockchain network and replicated among the participants in the blockchain. The code is then run and executed by all computers on the network. If a condition of the contract is met and verified by all participants of the blockchain network, the corresponding transaction is carried out.
So, where do these contracts work?
Examples of some of the most widely used platforms for developing and executing smart contracts on the blockchain are the following.
- Ethereum: Smart contracts are written in a programming language called Solidity and executed by the Ethereum virtual machine. The Ethereum platform is known as a common choice.
- Hyperledger: Developed by the Linux Foundation, it is recognized as an open-source system, a flexible platform on which non-cryptocurrency, smart contracts can be developed.
- Counterparty: This platform incorporates data into Bitcoin transactions, that is, it uses the cryptocurrency's blockchain and allows the development of contracts on it.
- Polkadot: It is an alternative to blockchain and is famous for hosting parachains, chains within chains, which allow more transactions than usual.
What Could Be the Benefits of Smart Contracts?
- Efficiency and Accuracy
When a condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there is no paperwork to process and no time is wasted on reconciling errors that usually result from manually filling out documents.
Since there is no third party involved and encrypted transaction records are shared between the participants, there is no need to question whether the information has been altered for personal gain.
Blockchain transaction records are encrypted, which makes them very difficult to crack. Also, because each record is linked to the previous and next records in a distributed ledger, hackers will need to change the entire chain to change a single record.
Smart contracts eliminate the need for intermediaries to process transactions, and therefore the time delays and fees associated with them.
These benefits make smart contracts important.
Smart contracts could have the potential to revolutionize the way you do business online. Without additional enforcement by third parties, it can become faster and more convenient than traditional contract law, which can turn into a financial advantage for businesses and consumers.
They are also decentralized because they are on the blockchain, which makes smart contracts more secure. As we discussed in the previous newsletter when we explained the concept of decentralization, there is no single point that can lead to failure or vulnerability to fraudulent actions. All parties have access to their funds at all times, helping to reduce fraud and protect both buyers and sellers.
For companies, the development of smart contracts is also important. One of the most important problems that companies face is the lack of trust in relationships with third parties. Organizations waste time making deals due to a lack of trust and transparency. But smart contracts are important so that conditions can be seen publicly. It makes it possible to create immutable and accessible contracts.
Let's Examine the Examples Using Smart Contracts 🔎
From reputation data to digital assets, you can store components in a smart contract to create a digital identity. When smart contracts connect to various online services, counterparties can obtain information about individuals without revealing their identity. Smart contracts can include credit scores that lenders can use to gauge potential risk.
For example, MyEarth ID is a decentralized "Identity Management System" that allows users to control their digital ID data and securely verify it with third parties.
One of the most exciting applications of blockchain technology and related smart contract technology is its ability to facilitate complex computational tasks, such as those related to machine learning and artificial intelligence (AI). By combining artificial intelligence with the decentralized security and immutability of blockchain technology, it has the potential to create AI-powered smart contracts.
As an example, Zilliqa is one of many blockchain platforms that has developed advanced computational capabilities with its proprietary smart contract programming language.
We have already mentioned that smart contracts can work without the need for any intermediaries or third parties. Designing a smart contract for an end-to-end supply chain eliminates the need for daily management or auditing. Any delivery received outside of schedule will act with pre-agreed measures to ensure a smooth operation.
Datahash is Australia's first example of a full-service agricultural supply chain platform. It works to prevent the $3 billion a year counterfeit wine market.
ReFi Turkiye Podcast 🎧️
🌱 Spotify, Apple Podcasts, Soundcloud and Spreaker. You can also get NFTs that we've made specifically for podcast episodes with the code you'll hear in episodes!
We listened to her works from our guest Gülcan Yayla and by focusing on the obstacles in front of young people in the digital economy, we addressed how to develop self-confidence, cooperation dynamics and communication skills in this area. We made a conversation about the responsibilities of institutions in the Web3 ecosystem and Turkiye's position in blockchain technologies.
Recommendation of the Week 🎥
In the broadcast on MetaCafe channel and presented by Çiğden Öztabak, imece Board of Directors member Buğra Çelik takes place. You can watch the episode where the meaning of the concept of ReFi, the innovations brought by blockchain technology for the benefit of society and where the young talents in the sector are discussed.