Before we approach to what is smart contract , let’s face some realities. Will you enter into a contract with someone you’ve never met? Or someone you don’t know and don’t trust? Will you start investing in a foreign business or company? Would you lend money to someone you don’t know or in a foreign country or a farmer?
The answer for all above questions are NO, because setting up an international contract for such a business is too high and risky. We might use trusted intermediaries to settle such a contract with a significant fees for their services.
Smart contract a new step to modern world
In the today’s internet, for businesses like Amazon, eBay, Airbnb, etc. result from lack of such a trustful native settlement layer. The solution lays in smart contracts. They make an agreement between people and businesses and the assets they own over the Internet, completely peer-to-peer, without the need for trusted agency. Although the concept of smart contract is not new but because of Blockchain we become able to perform it.
The primitive form of smart contract is a trading mechanism. Smart contract is the rule of transactions, for example, your go for a product to buy from a machine, you choose it on machine and it shows you the amount of money you must pay you insert your coin and machine eject your product. If you didn’t insert enough money, the machine wouldn’t eject the product. And they also offered 24/7 availability instead of limited opening hours.
A smart contract is managed by blockchain and is a self-enforcing agreement coded in computer. The code is consisted of rules which each parties agree to perform. When the predefined rules are conducted, the contract automatically forced parties to do rules. We can manage financial contract, for example think of it as a cryptographical box that has value and is lock, it will be unlock if specific conditions are met.
The underlying values and access rights they manage are stored on a blockchain, which is a transparent, shared ledger, where they are protected from deletion, tampering, and revision. Smart contracts, therefore, provide a public and verifiable way to embed governance rules and business logic in a few lines of code, which can be audited and enforced by the majority consensus of a Peer-to-Peer network.
How does it work?
A smart contract can be invoked from within and outside the blockchain. Among them, the “oracles” inject data that is relevant to the contract from on-chain into the contract. If data is implemented correctly, smart contracts could provide transaction security superior to traditional contract law, thereby reducing costs of auditing and enforcement agreements. They can track the performance of the agreement in real-time. They reduce the costs of (I) reaching an agreement, (II) formalization, and (III) enforcement.
But, smart contract security is still an issue that needs to be resolved. We will also need to be able to implement more sophisticated contractual clauses, including decentralized dispute settlement tools. While such developments might take more time to mature, some interesting dispute resolution solutions are already under development.
We will probably see a fusion of legal contracts and smart contracts emerge over the next few years as the technology becomes more mature and widespread, and as legal standards are adopted. However, we currently still lack best practices, and will probably need some time to go through a collective learning phase.
Use of Smart Contract
Smart Contract can be used for simple economic transactions like sending money from A to B. Smart contracts can also be used for registering any kind of ownership and property rights, like land registries, or managing smart access control for the sharing economy. Use cases can be found in banking, insurance, energy, e-government, telecommunications, music industry, art, mobility, education, and many more. With smart contract, every agreement, can have digital record that could be validated.
Smart contract could be used for complex agreements between actors, or supply chain of services, or for governing people that have same interests and goals without the need of centralized institution. The smart contract formalizes the governance rules and replaces day-to-day operational management with self-enforcing code.