A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts are self-executing contracts with the terms of the agreement between the parties directly written into lines of code. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible. Smart contracts are often described as “Turing complete” meaning they can handle complex computations.
The first mention of the concept of a smart contract was in a 1995 paper by computer scientist and legal scholar Nick Szabo. Szabo described smart contracts as self-executing contracts with specific properties, including being self-enforcing, transparent, and reliable. In the early 2000s, Szabo and others began developing prototypes of smart contracts using the Bitcoin blockchain.
In 2015, the first smart contracts were executed on the Ethereum blockchain. Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of fraud or third-party interference. Ethereum allows developers to create contracts that can be used to encode arbitrary state transition functions, allowing developers to create applications that go beyond simple financial transactions. Ethereum has become the most popular platform for developing smart contracts. Other platforms include Hyperledger Fabric, R3 Corda, and Chain.
Smart contracts have since become a popular way to automate transactions and agreements between parties. They are particularly well-suited for applications where trust is required but no third party is available or willing to mediate.
A simple example of a smart contract is an agreement between two people to exchange goods or services at a later date. The contract is written in code and stored on a blockchain, where it is automatically executed when the agreed-upon conditions are met.
The most popular smart contracts scripting languages are Solidity, Serpent, Lisp, Java, Python, Ruby, C++, PHP, and Node.js
Types of smart contracts
There are three types of smart contracts:
- Self-executing contracts: These contracts are automatically executed when the agreed-upon conditions are met.
- Interactive contracts: These contracts allow for two or more parties to interact with each other in order to agree on the conditions of the contract.
- Multilateral contracts: These contracts involve more than two parties.
How are smart contracts used?
Smart contracts are used in a number of ways, including:
- Banking. Smart contracts are used in banking to automate the contract-signing process.
- Real estate. Smart contracts are used in real estate to automate the property transaction process.
- Retail. Smart contracts are used in retail to automate the order and payment process.
- Healthcare. Smart contracts are used in healthcare to automate the patient consent process.
- Government. Smart contracts are used in government to automate the voting process.
Benefits of smart contracts
Smart contracts offer a number of potential benefits, including:
- Faster transactions. Smart contracts can help to speed up the transaction process, as there is no need for third-party verification.
- Reduced costs. Smart contracts can help to reduce costs, as there is no need for intermediaries.
- Increased security. Smart contracts can help to increase security, as they are tamper-proof.
- Increased efficiency. Smart contracts can help to increase efficiency, as they automate the contract-signing process.
What are the challenges of smart contracts?
While there are many benefits to using smart contracts, there are also a number of challenges that need to be considered, including:
- Complexity. Smart contracts can be complex and difficult to understand, which can make them difficult to use.
- Incompatibility. Smart contracts are not compatible with all platforms and systems, which can limit their use.
- Lack of regulation. Smart contracts are not currently regulated, which can lead to uncertainty and risk.
- Lack of standardization. There is no standardization for smart contracts, which can lead to confusion and inconsistency.
Real-life Use Cases of Smart Contracts
The following are some real-life use cases of smart contracts:
- Supply chain management. Smart contracts can be used to manage the supply chain of a company. For example, a smart contract can be used to track the shipment of goods from the supplier to the distributor and finally to the retailer. This can help ensure that the goods are delivered on time and that the correct quantities are delivered.
- Insurance. Smart contracts can be used to manage insurance contracts. For example, a smart contract can be used to track the terms of an insurance policy and to automatically payout when a claim is made.
- Real estate. Smart contracts can be used to manage real estate contracts. For example, a smart contract can be used to track the terms of a real estate contract and to automatically payout when a payment is made.
- Car rental. Smart contracts can be used to manage car rental contracts. For example, a smart contract can be used to track the terms of a car rental contract and to automatically pay out when the car is returned.
While smart contracts are transparent and can be verified by anyone with access to the code, they are still in their early stages of development. Nevertheless, smart contracts hold great potential for the future of contract execution. They could be used to streamline the process of contracting, reduce the risk of fraud, and improve transparency and trust between parties.