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Art + Blockchain + Inclusion
Learning Center: Smart Contracts Simplified
What are smart contracts?
Smart contracts are an open-sourced blockchain-based technology used in executing transactions between two or more parties. Smart contract technology is written in code containing specific terms and conditions and then stored on a blockchain. This process involves stakeholders agreeing to the transaction terms without the need for a mediator because the contracts are self-enforcing.
Smart contracts are made available to the public through blockchain platforms. They can be used to complete a transaction or initiate the next action after completing a task. Meanwhile, all parties involved in the transactions are aware of the outcome.
The code can be a whole piece of an agreement or a compliment of the available traditional agreement terms. For every new transaction initiated, the code triggers the creation of a new block, the data on which cannot be reversed, changed, or deleted.
How Do Smart Contracts Work?
Smart contracts operate based on the “if/when…then…” statements encoded on a blockchain. They state that if/when a task is complete, then ‘X” is the next thing to do. Computers execute these actions once the parties involved meet the preset conditions. The systems then go ahead and verify the agreements and trigger the agreed-upon result such as the release of funds, vehicle registration, ticket issuance, etc. The blockchain is then updated upon completion of the resulting transaction.
5 Benefits of Smart Contracts
1. Accuracy
Smart contracts record the terms and conditions within the code, thereby decreasing mistakes resulting from human error. This leads to a high level of precision in transactions while lowering the risk of inaccurate interpretation.
2. Speed
Executing transactions or signing agreements through smart contracts takes only seconds. This efficient speed is possible because the execution is conducted via the internet. It saves time compared to the traditional ways of transactions and allows for quick and efficient modifications.
3. Security
The data in a smart contract is stored across the blockchain network with an extremely high level of encryption. In order to alter a blockchain, a malicious hacker would need to change the entire chain of data. The is generally considered an impossible feat.
4. Transparency
A smart contract is stored on the blockchain and all participants in the network have access to it. This level of transparency creates an environment of trust and security.
5. Storage and Backup
Smart contracts record essential details for every transaction. These details are stored permanently and replicated across the network. They are saved for future reference and can be retrieved when there is a case of data loss.
Applications of Smart Contracts
Many industries are using smart contracts for their high level of accuracy, reliability, and transparency. Here are just a few of the ways smart contracts are currently being used:
Supply chain
Supply chains have experienced high rates of fraud and loss due to alterations on forms going through different channels for approval. This can be reduced using smart contracts. Organizations use smart contracts to obtain approvals through digital means on a blockchain platform. Likewise, smart contracts are being used to manage inventories and automate payments.
Real Estate
Real estate deals are often a challenging process for both buyers and sellers. There are negotiations, paper signings, and legalities involved in transferring ownership rights that can be complicated and time-consuming. Smart contracts allow for the centralized registry of the property, enabling buyers and sellers to transfer ownership very quickly, which cuts down on the use of lawyers and agents.
Insurance
Two persistent problems in the insurance industry are the lack of trust and the inflation of operational costs. These can be reduced by using smart contracts to automate funding processes. Likewise, evaluating an insurance claim can be complex and time-consuming, requiring data input and communications from many parties. A smart contract can streamline the process and eliminate some or all of the intermediaries, which can decrease inefficiencies and costs.
Entertainment Industry
The entertainment industry has a long history of disputes involving proper payment to those in creative fields. Authors, musicians, photographers, and other artists are often not paid the royalties they deserve due to their inadequately recognized intellectual property. Using smart contracts allows for the transparent registry of ownership and authorship, which makes for accurate accounting and a quick turnaround time for royalties.
NFTs
NFTs are tokenized versions of digital assets (think art, music, or games, for example) created using smart contracts. These tokens are then permanently added to the blockchain in a process known as minting. NFTs are applied in many ways with some highlights as follows:
- NFTs as art, music, and other creative digital assets
- NFTs for brand awareness
- NFTs for fundraising
- NFTs for gaming
Key Takeaways:
- Smart contracts are an open-sourced blockchain-based technology used in executing transactions between two or more parties.
- Smart contracts operate based on “if/when…then…” statements encoded on a blockchain. Computers then execute the actions of these statements once the parties involved have met the preset conditions.
- Smart contracts have many benefits, including accuracy, speed, security, transparency, storage, and backup.
- A growing number of individuals and industries are using smart contracts in a variety of practical and creative ways.