What are Smart Contracts in Blockchain? [Complete Beginner Guide to Understand Smart Contracts]

The subject of Blockchain is quite vast. There is no question about the importance of blockchain. And it’s filled with many topics you might not have heard of before. One of those topics is smart contracts. Many people wonder, “What are smart contracts in blockchain?” 

In this article, we’ll answer the very same question. You’d get to know what smart contracts are, how they work, and what are their qualities. Let’s get started right away.

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What are Smart Contracts in Blockchain?

In Blockchain, a smart contract is a program that automatically and directly handles the transfer of assets or information between certain parties under specific conditions. It’s similar to traditional contracts but differs in terms of enforcing the agreement. Smart contracts are just like legal contracts, i.e., the parties of the deal have to follow it strictly. The enforcer of smart contracts is their code, while the enforcer of legal agreements is the law.

Smart contracts are getting popular because of their rigidity and assurance. Thousands of people oversee these contracts to ensure they remain free from faults. These contracts help in transferring digital assets to the concerned parties with ease.

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How it Works

The working of smart contracts is quite simple to understand. They carry information and permissions, which their creators write in code. This code present in the contract requires the parties to follow the given steps exactly they are specified. Once the concerned party follows the specified steps exactly, only then the contract triggers the agreement.  

In simple terms, you can say that a smart contract is a digital contract secured with blockchain technology. You can add deadlines (time constraints) in a smart contract as well, which increases their functionality considerably. They function on the ‘IF-THEN’ logic. Here’s how:

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• IF party A sends the required object, THEN party B’s funds will automatically get transferred to party A
• IF you finish the project your client had assigned to you, THEN the payment for it (the funds) will get transferred to you

The funds could be in cryptocurrencies such as bitcoin or ether. You also have the option of adding ‘WHEN’ constraints to your contracts. You can add as many ‘IF-THEN’ constraints as necessary. There is no limit to it. 

While the logic behind the working of smart contracts is quite simple, its features make it more outstanding. You see, a blockchain-based smart contract is affordable, decentralized, immutable, and transparent. The ledger of blockchain stores the address of every smart contract. To interact with a contract in Blockchain, you’ll need its address. 

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History of Smart Contracts

Nick Szabo was a cryptographer and a legal expert who saw the potential of using a decentralized ledger for maintaining smart contracts in 1994. According to him, one can create intelligent contracts by writing code and store it in a computer network of Blockchain. He also mentioned that you could transfer digital assets between the concerned parties by using this system. 

Bitcoin was the first network that started using smart contracts. It used them for transferring value from one person to another. At that time, a smart contract used to check simple conditions, such as whether the party has the required amount present in its account or not. Bitcoin used to create contracts by using Turing-incomplete language. 

Then came Ethereum, and it improved the function of smart contracts further. Ethereum enabled programmers and developers to create custom smart contracts using Turing-complete language. As Ethereum employed Turing-complete language, it was able to enhance the functionality of its contracts. 

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Use Cases of Smart Contracts

Smart contracts are a fantastic innovation. Even though many governments take cautious approaches to blockchain technology, several of these governments also recognize their effectiveness and functionality. Smart contracts have plenty of advantages, which make them useful in many industries. Here are a few industries, which would benefit the most from using such agreements:

Banking

The banking sector is one of those sectors which are employing smart contracts. Recently, J.P. Morgan, Citi, Bank of America Merrill Lynch, Credit Suisse, and the DTCC (Depository Trust and Clearing Corporation) traded credit swaps with this technology. 

Their smart contracts had information, including risk metrics and trade details. The use of these intelligent contracts helped them in enhancing transparency between the regulators and the partners. 

A group of 61 banks of South Korea and Japan is working on using Blockchain for transferring money between these two countries more efficiently and securely. Russian government’s Sberbank is also testing the application of Ethereum’s Blockchain for its smart contracts. Learn more about blockchain applications in banking industry.

Real Estate

Smart contracts can help in getting rid of the middlemen present in this industry. Suppose you need to buy a new property, and you hire an agent. First, the agent will take a hefty commission from your transaction, and then, he or she would also charge you for a failed escrow. 

Mediators cost a lot of time and money. Smart contracts can help in the removal of these middlemen and facilitate the process substantially. For example, you might get the ownership of the property as soon as you transfer a certain sum to the seller’s account. 

Voting System

Governments can use these contracts to improve the transparency and security of the voting system. There are plenty of reasons why smart contracts would be perfect for the modern voting system. Even though governments keep mentioning that the current voting system is 100% secure, but it can’t be more reliable than smart contracts. 

These contracts are immutable. So no one can change your vote once you’ve cast it. Other than that, the encryption of Blockchain would ensure that there’s no issue of security. No organization is capable of hacking into an encrypted blockchain network. Smart contracts can enable online voting and allow people to vote from anywhere without standing in long queues.

Advantages of Using Smart Contracts

As we mentioned earlier, smart contracts have a plethora of features and benefits. That’s why they’re getting popular. Here are the most prominent benefits of using smart contracts:

• Trustability

No party can lose their documents or the contract. They remain safe on the decentralized network of Blockchain. Smart contracts remove the need for trusting other people for the execution of your contract. That’s why they are the most trustworthy solution in this field. 

• Saving of Resources

Smart contracts can save you a lot of time and money. You wouldn’t have to worry about paying someone else to oversee your contract. You also don’t have to interact with a third-party to facilitate the agreement. 

• Efficient

Agents, facilitators, and intermediaries take up a lot of time. Smart contracts help you in avoiding them altogether. And as you avoid these facilitators, you get to save a lot of your time. 

Moreover, the execution of smart contracts takes no time at all. As soon as the parties meet the requirements of the agreement, it executes the transfer. It wastes no time there as well. 

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• Autonomous

Smart contracts get rid of intermediaries and third-parties. The people who interact with the contract are you and the other parties. There’s no one else involved. 

As the contract removes mediators, it gives you complete control over the agreement. Blockchain is decentralized, so the executors of a smart contract are the nodes of a network. This means, no single party has complete control over the execution of your contract. 

• Safe

Blockchain is based on cryptography. And cryptography makes it nearly impossible for a hacker to breach the security of your contract. You can transfer assets safely without worrying about the agreement getting modified by a third-party. 

Any party who wants to access your contract will have to do so through you or the second party. If they try to hack the encryption, they’ll have to go through a large extent of secure blocks, which is impossible for any small or even mid-size organization to do. 

Due to this reason, smart contracts are quite safe to use. 

• Security

You don’t have to worry about losing your contract because of some reason. That’s because Blockchain saves its contracts on a shared network of computers (ledger), and it is one of the safest solutions for this purpose. 

Limitations of Smart Contracts

Because smart contracts are still a new technology, there are certain limitations to them. The most significant weakness is its application. Even though we’re familiar with their potential applications, there aren’t any methods of applying them in those industries at this time. Organizations all over the globe are working on it. 

Another issue of regulation. Governments don’t know how to regulate smart contracts. That’s why many governments are highly skeptical about Blockchain. These issues cause hesitation among the potential adopters of this technology.

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Learn About Smart Contracts and More

Smart contracts are the technology of the future. There’s a strong positive trend in the popularity of Blockchain, even if it’s relatively new. Learning about smart contracts and Blockchain will surely help you in gaining the skills necessary for the jobs of future tech.

There is a rise in careers in blockchain technology and blockchain has tremendously changed the very face of the technology industry forever. If you’re interested to become a blockchain developer and build smart contracts and chaincodes, checkout IIIT-B & upGrad’s PG Certification in Blockchain Technology.