A smart contract describes the digital way of exchanging money for goods and services, buying property, trading shares, and many more transactions. The contract is fulfilled by a computer code, not by people. The creators of the contract specify the terms and conditions, then leave it to the code to control, monitor and satisfy the contract. The blockchain is the technology that enables smart contracts. The contract sits in a blockchain within a distributed ledger accessible through a vast network of computers.
There’s no spectrum of human endeavor that can’t benefit from a smart contract. There is a vibrant and dynamic blockchain for enterprises and blockchain powering smart contracts for the law, real estate, finance, and healthcare sectors. Smart contracts have become the driving force channeling financial derivatives, insurance plans, intellectual property law, bank loans, and crowdfunding.
In any smart contract, it is left to the code to validate each component. If the code concludes that parties have fulfilled their obligations, money or some other form of value changes hands. If the code detects violation of agreed terms, the money gets refunded to the sender. The smart contract becomes a foolproof way of concluding a contractual obligation.
Let’s say you’re buying a property the old-fashioned way. You enter into a sale/purchase contract with the property owner. Then, you run the transaction through professionals like real estate agents, bankers, lawyers and title verifiers. The string of middlemen add layers of expenses inflating costs. Secondly, there’s always the risk of someone somewhere in the chain raising a dispute saying “I paid but didn’t get the delivery.” Traditional contracts compel you to repose trust and faith in people you know nothing about.
Imagine the same transaction pushed through in a digital format. Let’s say an apartment is listed for sale. The buyer/seller terms and obligations are coded in a smart contract embedded within a Blockchain. The terms allow a specific timeframe for the code to validate each buyer/seller obligation, and fixes a sale date in the near future to exchange fees and keys.
The seller eventually passes on a digital password or entry key to the buyer. The code holds the key on the seller’s behalf till the terms are settled. If any part of the contract remains unfulfilled, the key returns to the seller, and the fee remains with the buyer. If all goes as planned, the code automatically settles the contract by releasing fees and keys simultaneously on the sale date.
The smart contract holds and releases funds only on satisfaction of agreed terms, and only after every coded deadline or milestone is successfully completed. The coding achieves this without the bias of human interference. The Blockchain makes the smart contract more credible than human dealings.
The contract is embedded in digital code as a shareable database for everybody to witness and validate. Each contract leaves a trail of transactions that are verifiable by members having access to the distributed blockchain ledger.
Secondly, smart contracts are immutable. No person holds the power to change or terminate the contract midway. The digital transaction trails can’t be tampered with by any party without the entire network being alerted. Any violation will be invalidated by other members.
The smart contract packs a powerful punch that empowers not just individuals but the largest of corporations.
There’s a heady sense of being autonomous and independent. You set the agenda (terms) of the contract, and no one interferes in its execution. A clutch of middlemen can be dispensed with. The Blockchain network handles the job from start to finish. There is no room for error, and no human bias can derail the contract.
It's a code written inside a blockchain within a distributed ledger run by a huge network of computers. Encryption keeps the coding secure and tamper-proof. No person can steal the information or change its character. Digitization of the contract is foolproof and inspires trust.
Every party to the contract backs each other, preserving multiple copies of your data within the Blockchain distributed ledger. The bank may lose your document, but the digital record within the blockchain is permanently backed up.
Advanced encryption protocols keep your data cocooned in a safety net. Private keys grant access to personal data only to the owner. The data can’t be hacked, or changed and is incorruptible.
Traditional contracts are tedious and time-consuming as they involve middlemen shuffling documents. The blockchain technology automates each step of the contract, ensuring faster turnover and a guaranteed outcome.
Manual contracts can’t do without middlemen demanding hefty fees for document processing and title verification. These factors are not issues in the digital world because identity and ownership are integral to blockchain processing and no fees are payable for this service.
There is no scope for error as the smart contract is meticulous in following the terms coded into the original contract. The contract is programmed not to deviate from the original terms. Manual contracts, on the other hand, are error-prone and influenced by whims and fancies of parties.
Ironically, the very professionals (bankers, lawyers, CPAs) that should feel threatened by smart contracts are busy researching the potential of the technology. There’s ample opportunity for lawyers to standardize the template for smart contracts. Finance managers and accountants would find blockchain fueled smart contracts useful in assessing risk and in auditing business enterprises. We are possibly moving to a situation where blockchain verifies the contract and a paper copy is retained for legal purposes.
Ethereum is a unique blockchain platform that uses a cryptocurrency called Ether (ETH) to fuel smart contracts. Basically, it's a huge array of networked computers hosting a software that records smart contracts. Unlike the Bitcoin platform that revolves entirely around that cryptocurrency, Ethereum is a blockchain platform that offers creative solutions for enterprises because it allows developers the freedom to frame their own programs.
The world owes a lot to the Ethereum platform for popularizing the concept of a smart contract. The creation of smart contracts represented a huge shift from third party based contracts to a contract system that is uniquely controlled and self-executed by computers.
Building on the foundations of Ethereum Blockchain technology, enterprises can migrate entire business segments into smart contracts with the capability for self-execution, internal auditing, and regulatory compliance. It is estimated that there are more Ethereum fueled smart transactions dominating the digital world than all cryptocurrencies put together.