Smart Contracts: what are they and what do they offer?
Through a smart contract, actions can be self-executed according to a series of already programmed parameters. All this in an immutable, transparent and completely secure way.
Nowadays, there are a lot of new terms that we need to understand if we want to advance. Since Bitcoin was born and the launch of its first version in 2009, there have been many interesting projects that have been appearing, providing new ideas and decentralized solutions to many of the centralized processes or applications that we all use today. In that case, let us ask you: do smart contracts sound familiar to you? - Today we'll be talking about them, what are they and what they can offer.
According to IBM, smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met. But, how do they work?
We understand "contracts" as verbal or written agreements. These documents, normally refer to territorial laws and jurisdictions, and sometimes require notaries. That is, more costs, time and third parties involved in the process.
On the other hand, a smart contract is capable of executing and enforcing itself, autonomously and automatically, without intermediaries or mediators. They avoid the burden of interpretation by not being verbal or written in the languages we speak. Smart contracts are “scripts” (computer codes) written with programming languages. This means that the terms of the contract are pure statements and commands in the code that forms it.
A smart contract can be created and called by natural and/or legal persons. But also by machines or other programs that work autonomously. A smart contract is valid without depending on authorities. This is due to its nature: it is a code that is visible to all and cannot be changed as it exists on blockchain technology. This gives it a decentralized, immutable and transparent character.
They work by following simple “if/when…then…” statements that are written into code. Within a smart contract, there can be as many stipulations as needed to satisfy the participants that the task will be completed satisfactorily. To establish the terms, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when...then…” rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes.
Then the smart contract can be programmed by a developer – although increasingly, organizations that use blockchain for business provide templates, web interfaces, and other online tools to simplify structuring smart contracts. But what are the applications and benefits of having smart contracts?
5 Benefits of Smart Contracts
- Real-time updates. The technological nature of the smart contract itself causes the speed of business processes to increase considerably.
- Lower execution risk. The execution process is immutable and decentralized, therefore there is NO risk of manipulation, non-compliance or mistake in the management of said contract.
- Greater precision. The automation of the system not only provides speed but also greater reliability. No errors occur in the transaction.
- Fewer middlemen. This type of agreement directly eliminates the intervention of third parties such as banks or notaries who give faith and confidence to that agreement.
- Lower cost. As there are no intermediaries to verify or carry out the contract, transaction costs are automatically reduced.
In short, Smart Contracts are a consequence of the Blockchain that I have talked about so much lately. It consists of a change of mentality that intends to change the world of transactions between individuals and companies.
Some of the procedures that can be carried out through smart contracts are: financial transactions, copyright management, payment systems, transfers of rights and obligations, automation of inheritances and donations, logistics, among others.
Thanks to the fact that it is an automatic process and in which the privacy of the participants in the agreement would not be violated, it gives it a novel and at the same time very attractive character for all those contractual transactions.
Tell us your opinion about smart contracts! Did you already know about them?
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