Smart contracts are transforming how we make and execute agreements in the blockchain world. These self-executing digital contracts are changing the game for the financial, real estate, and supply chain management industries.

But what are smart contracts, exactly? Walk with me as I describe it in terms that even a two-year-old can grasp.

What is a smart contract?

Smart contracts are computer programs written in code and saved on the blockchain network. They automate, validate, and enforce the negotiation and performance of an agreement.

Their main goal is to:

• Execute an agreement automatically, without intermediaries.

• Ensure that all parties can confirm the conclusion instantly.

Additionally, these computer programs are designed to execute contract terms when certain criteria are met.

Let’s paint a picture to help you understand:

Imagine you have a book that you wish to give to a buddy. You agree to offer your friend the book in exchange for a shoe; we can call this a contract-like arrangement.

As humans, you may forget the terms of your contract. But what if you had a super assistant who recalls when and what you agreed to with your friend? And when your friend hands you the shoe, the assistant gives your friend the book without your intervention.

Smart contracts work similarly. But instead of books and shoes, you can use them to buy a house, make a payment, or track a shipment.

What makes them so special?

Smart contracts are stored on an encrypted, decentralized, distributed ledger to ensure tamper-proof and transparent storage. Because of their high level of accountability, they:

• Create trust.

• Reduce the risk of fraud.

• Minimize disputes between parties.

Also, with smart contracts, you no longer need intermediaries like lawyers or banks to oversee contract implementation.

Thereby:

• Lowering costs

• Enhancing efficiency

How do smart contracts work?

In the 1990s, Nick Szabo proposed smart contracts for the first time. He made the analogy between smart contracts and vending machines. You know how you put a dollar in the machine, choose a Coke, and the machine produces the drink and any change (if you have any) without any human intervention?

Yes, smart contracts automate nearly any type of exchange in the same way.

Smart contracts follow basic “if-then” expressions written into code on a blockchain network. A network of computers performs the actions when preset circumstances are met and validated. Examples of such actions are sending a notification, issuing a ticket, or registering a vehicle. When the transaction is finished, the blockchain is updated, meaning that the transaction cannot be modified and that only those granted permission may access the outcomes.

For example, let’s say you want to buy candy from a candy store. You make a smart contract with the store that says you will give them some money, and they will give you the candy. You give your money to the smart contract, which remembers that you paid. The smart contract automatically gives you the candy when the store sees you paid, just like a magic trick!

However, if the store doesn’t deliver the candy, the contract is canceled, and your money will be reversed.

While Ethereum is the most popular smart contract platform, it may also be run on several other cryptocurrency blockchains, such as Tron, Neo, and EOS. Keep in mind that a smart contract can be created and deployed by anyone. Furthermore, because its code is transparent and publicly verifiable, any interested person can see a smart contract’s logic when receiving digital assets.

Applications Of Smart Contracts

Now that you understand what a smart contract is and how it works, let’s look at some real-world examples.

Supply chain management

Because smart contracts run independently and without the involvement of third parties, creating one for an end-to-end supply chain will relieve you of the burden of daily management and audits. Any deliveries received outside of the timetable may result in pre-agreed-upon escalation steps to ensure smooth functioning.

Finance and banking

Smart contracts enable developers to create a wide range of decentralized applications (dApps) and tokens. Decentralized finance (DeFi) apps, for example, aim to alter the banking industry by leveraging the trustless and transparent qualities of smart contracts and blockchain technology.

DeFi dApps offer similar services to the banking and financial services industry, such as lending, borrowing, trading, and other financial services, as well as new product kinds and decentralized business models that give significant benefits and utility to consumers.

DeFi ventures have already generated billions of dollars in value, and this trend is expected to grow as more individuals get acquainted with the sector’s distinct value propositions.

Real estate

Through tokenization, smart contract technology is increasing fractional ownership of real estate. Instead of a single individual owning a property, you can segment ownership so that people can purchase tokens for the property. When someone buys a token, they get a piece of the property. By combining blockchain and real estate transactions, the barrier to entry for many investors is reduced.

Conclusion

Smart contracts can change several industries while also empowering individuals and businesses in the digital age. Embracing smart contracts can open the door to new opportunities, creativity, and transformational changes in the way we connect and transact. So, businesses should embark on this exciting trip, have an open mind, and be ready to embrace the future of smart contracts.