Smart Contracts / Smart Transactions
In this article, we will look closely at everything related to smart contracts. We try to explain this as simply as possible, a ‘dummy-proof’ explanation. We answer the following questions:
- What is it?
- How does it work?
- What does it have to do with blockchain?
- What applications are there?
- What are the disadvantages?
What is a smart contract?
A smart contract is an agreement written in code language, which automatically takes effect when certain circumstances are met. Think of “Bob’s car is automatically transferred to Johan when Johan transfers 10,000€ to Bob”.
An advantage of Smart Contracts is that no third party needs to be involved. In the case of the example above, there would normally be an authority involved that tracks the ownership of cars. In the case of a Smart Agreement, this intermediary, a so-called ‘middle man’, is not necessary. The idea behind a Smart Contract was conceived in 1994. Nick Szabo, a Hungarian student, figured out that decentralized systems could work in conjunction with self-executable contracts.
How it works
Smart Contracts work based on an ‘if X, then Y’ principle. Above, we already gave an example of selling a car. The rule was that if Party B transferred a specific amount to Party A, it would become the car’s owner. These contracts work based on written computer code.
A Smart Contract can be drawn up using different programming languages. For example, the code for agreements within Ethereum is mainly written in Solidity. Other crypto currencies, such as Bitcoin, use C++ or Java.
A Smart Contract meets the following characteristics:
- Contracts work with the help of blockchain This means that data cannot be tampered with and that transactions are visible to everyone
- A contract is executed automatically as soon as the agreed conditions are met
- Van alles wat er op de blockchain gebeurt wordt een backup gemaakt. Er bestaat dus geen gevaar dat gegevens kwijt raken
What does a Smart Contract have to do with blockchain? We have just seen that in the case of a Smart Contract, there is no need for an intermediary or independent party. With normal contracts, an independent party, such as a notary, ensures everything runs fairly.
Blockchain technology is used because no third party is involved in this case. A blockchain is completely decentralized. This means that everything that happens on the chain is first verified by multiple computers (nodes) within the network. This process ensures that manipulation or fraud is not possible.
Governments can use Smart Contracts for different purposes. One of the most logical applications? Elections! In every election or referendum, all votes are counted by hand. Because everything is done by hand, a lot can go wrong in counting and identifying eligible voters. Smart Contracts will make the system much less susceptible to fraud.
Smart Agreements can also be of value in logistics. For example, a company can automatically refill its products on the basis of delivered goods. A rule could be; ‘if order X is delivered, please place a new order with supplier Y’.
You depend on an intermediary such as Airbnb to rent your holiday home. These also require a certain committee for their services. With a Smart Contract, you establish, ‘If customer X transfers an amount of 400€ to account 1234ABCD, please send an access code to the apartment working for the following dates: date 1, date2 and date 3’.
There are often discussions about medical patient data. It happens too often that information about patients reaches people who do not have permission to view this data. A Smart Contract can ensure that data is only visible to persons with lawful access.
Currently, an insurance premium for your car is determined based on how often you have used your insurer in recent years. This may be a good starting position, but not entirely fair. For example, it says nothing about who was actually guilty of an accident or about someone’s driving. By recording driving behavior, an insurer can determine how high the premium should be.
There are two major disadvantages of Smart Contracts. So it’s all still very new and difficult to understand. It will therefore take some time before people become familiar with it and also like to use it. The second disadvantage is that there may be errors in the code. After all, the code is still written by humans, so there is a chance that there may be an error in it. It is therefore important that each contract is checked by several parties before it is used. One cryptocurrency project that specifically deals with this is Quantstamp (QSP).