Smart Contract is a term that describes a special set of protocols capable of automatically implementing terms and agreements between parties in a contract thanks to the support of Blockchain technology. So What is Smart Contract and How does it work?
What is Smart Contract?
Smart contracts were first described by Nick Szabo in the 1990s. At the time, he defined smart contracts as a tool to formalize and secure computer networks by incorporating protocols with the user interface. Szabo discussed the possibility of using smart contracts in various areas related to contractual arrangements - such as credit systems, payment processing, and content copyright management.
In the world of cryptocurrencies, we can define a smart contract as an application or program running on the blockchain. Smart contracts are like a digital contract enforced by a specific set of rules. These rules are predefined by the computer code, and all nodes in the network must copy and execute those rules.
In essence, blockchain smart contracts allow the creation of protocols that do not rely on trust. That is, both parties to the contract can make commitments through the blockchain without having to know or trust each other. They can guarantee that if the conditions of the contract are not met, the contract will not be enforced. Besides, the use of smart contracts eliminates the need for intermediaries, greatly reducing operating costs.
Although the Bitcoin protocol has supported smart contracts for many years, they have become popular by Vitalik Buterin, Ethereum's creator and co-founder. However, each blockchain has a different smart contract implementation method.
How does Smart Contract work?
The mechanism of operation of Smart Contracts can be said to be similar to a vending machine. This means that they will only automatically execute the preprogrammed terms before they meet the requirements.
First, the terms of the contract will be written in a programming language, then encrypted and transferred into a block of Blockchain. Once transferred into the block, this Smart Contract will be distributed and reproduced by the nodes operating on that platform.
After receiving the deployment order, the contract will be implemented by the predefined terms. At the same time, Smart Contract will automatically check the process of fulfilling the commitments and terms stated in the contract.
What are the benefits of a smart contract?
Smart Contract is an application that takes advantage of all the strengths of Blockchain technology so it has many benefits, below are its main benefits.
- Automation: The process is done automatically. At the same time, you are the one who created the contract, no longer has to depend on brokers, lawyers, or anyone else. As such, it also eliminates risks from third parties
- Do not get lost: Your document is encrypted on a shared ledger, meaning it cannot be lost. With Blockchain, all your friends store your documents.
- Safety: Blockchain will ensure the security of your documents. No hacker can threaten them.
- Speed: Smart contracts use programming languages to automate terms, cutting unnecessary working time.
- Saving cost: Smart contracts reduce your costs by eliminating intermediaries.
Pros and cons of Smart Contract
1. Pros of Smart Contract
Smart Contract application can be used in many fields in the future, currently, some areas have implemented smart contracts including Cryptocurrencies, logistics, banking, real estate, elections.
- Freedom: Not regulated by any agency
2. Cons of Smart Contract
- Legality: You will not be protected rights when an error occurs because the current law of the country does not have policies on managing smart contracts.
- Deployment costs: Pay for infrastructure systems, computers, and developers
- Risks from the internet: The nature of the Smart Contract is very safe, but if you disclose some sensitive information or are exploited by those hackers, you will have trouble.
What does it take to create a Smart Contract?
To create a Smart Contract, you need to have the following requirements:
- Contract subjects: Smart Contract must be granted access to the products/services listed in the contract to be able to automatically lock or unlock them.
- Digital signature: All parties to Smart Contract must agree to implement the agreement with their private keys.
- Contract terms: Terms in Smart Contract takes the form of a series of activities. And the parties to the contract must sign to accept it.
- Decentralized platform: Once completed, the Smart Contract will be uploaded to the Blockchain of the respective decentralized platform and distributed to the nodes of that platform.
The application of smart contracts
Jerry Cuomo, vice president of IBM's Blockchain technology, believes that smart contracts can be used in many cases from financial services, healthcare to insurance. Here are some examples of its applications:
The manipulation of election results is very difficult, but still possible, but for smart contracts, it will never be manipulated. Because the vote is protected by the ledger will need to be decoded and need to have sufficiently strong access to it. And the truth is no one holds such power in the blockchain.
2. Use for managers
Blockchain not only provides a reliable ledger but also eliminates risks thanks to an automated, transparent, and accurate system. Usually, business is not always convenient because of waiting for consensus or resolving external and internal issues. Blockchain ledger will solve this.
In 2015, Trust & Clearing Group (DTCC) used a Blockchain ledger to store information on securities assets worth $ 1,500 trillion, which means 345 million transactions.
The supply chain in any business is a stretched system and consists of many different parts. Each department has certain jobs, which must be done sequentially.
This is a lengthy process and requires a lot of resources to participate, but with Smart Contract, each participating department can track the work progress from which to complete the task on time. A smart contract ensures transparency in contract terms and prevents fraud.
It can also provide us with the ability to monitor the supply process if integrated with the Internet of Things.
4. Medical services
With Smart Contract, the patient's medical records will be encrypted and stored on Blockchain with a private key, only those who have that key can access to view the records. At the same time, the bills for the surgery are stored on Blockchain and automatically transferred to the insurer. The ledger can also be used in health care management, such as medication monitoring, test results, and management of medical supplies.
Besides Smart contract, there are many other applications, such as management, banking services, insurance, real estate, and so on.
Hope this article help you get more useful things about smart contracts. If you have any questions or would like to share your knowledge of Smart Contract with us, please leave a comment, we will respond as soon as possible.
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