What Are Smart Contracts?

The smart contract–it’s a contract that functions like a business rather than, well, just a contract. Perhaps you fancy yourself a technical visionary (I know I do). If so, you’ll want to keep your eye on this emerging smart tech tool. It’s well on its way to profoundly changing how we do business.

Though smart contracts resemble traditional contracts–they both define rules and result in actions being taken–the similarities end here. Smart contracts are actually sections of code that are immune to security threats. They are also self-enforcing. You could think of them as contracts that multitask. They store the directives of the contract, then confirm and carry out those directives. 

A unique and efficient tool, the smart contract can manage financial aspects of the agreement and act as a mediator, holding all parties accountable the way a lawyer would. And it accomplishes this, thanks to cryptology.

Smart contracts are an application on blockchain, a chain of records (“blocks”) that are connected via cryptology. Understanding this about blockchain will help you grasp why smart contracts are so secure.

Blockchain itself is considered an immutable distributed ledger. This means that once a smart contract is loaded into the blockchain, it is nearly impossible to alter it. 

Distributed, in this context, refers to the absence of a central authority. All elements in the blockchain, including a smart contract, are held accountable by an entire network of databases (ie., the blockchain). Therefore, no intermediary is needed outside of the coded smart contract itself. 

Since the design of the smart contract allows you to cut out any middlemen, you save time, money and the hassle of adding additional people to the mix. This is why blockchain-based smart contracts are, across the board, more secure and less expensive than traditional contract setups. 

A key to the autonomous nature of smart contracts is their coding. Smart contracts can use algorithms to automatically respond to the parameters of the contract, such as when a milestone is reached or an incident occurs. For example, say a contractor finishes a project and sends an invoice. The smart contract is coded to respond with the agreed-upon action: issuing a payment to the contractor and notifying them of their next job or end of contract.

This also makes it difficult to alter smart contracts. The boundaries of the contract and all transactions related to it are coded into and made publicly available via a blockchain ledger. No one can go in and tweak the smart contract independently of a consensus from the blockchain. And once an alteration is made, every database in the blockchain is aware of it. 

Immutability is not the only reason smart contracts create a sense of security. Though the ledger activity is posted publicly on the blockchain and can be monitored, information about the clients or contractors remains private. The identity of the individuals is not shared. 

Entrepreneurs and business traditionalists alike will benefit from transitioning to this technology. Taking advantage of the security smart contracts offer will set you apart as a technical visionary. Embrace the future of business transactions through smart contracts.

Denis Bederov

Comments are closed.