What is a Smart Contract ?

What is a Smart Contract ?

A smart contract is extremely almost like a traditional contract except that it's completely digital – it’s a bit of code stored on the blockchain. Because it’s completely digital, a sensible contract doesn’t believe a 3rd party - it removes the need to trust a 3rd party. Traditional contracts always rely on a third party.

Example of Smart Contract

For example, if I am going to rent a property from you, the estate agent will draw up a contract that we will both sign. I will then pay my deposit and my rent to the estate agent who will then pay it on to you before you give her the keys, which she then passes on to me. We are both trusting the realtor (who is that the third party during this instance) to offer the cash and therefore the keys to the proper people. A smart contract removes the necessity for the third party. It is a secure online system for digitally verifying, enforcing or facilitating an agreement.

Connection of Smart Contract with Blockchain and above Example

A smart contract is usually a piece of decentralized code that sends money when a certain input is received and records all information securely on the blockchain. So in our rental example, the smart contract could be programmed to carry my rental payment until I even have confirmed you've got given me the keys. Once I even have as long as confirmation, the cash is automatically sent to you.

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Smart Contract and Technology

Smart contracts force people to be honest. I recently read a talk by Henning Diedrich who said “Smart contracts are to legal, banking and governance what the internet was to the music and film industries.” So he clearly thinks they’re pretty revolutionary– and I have to say I agree. In the next section, I’m going to cover the four major features of a smart contract, followed by some of the challenges when it comes to using smart contracts in the real world.

A smart contract is: 

• A Smart Contract is Dependent on inputs. An input is when someone confirms that what is specified on the contract has been completed. Getting our back to the example of renting a Property, in this instance, the input will be when I would confirm that you have given me the keys to the Property. The smart contract would then be programmed to send you my rent.

•A Smart Contract is Exact. The implications of the Smart-contract are previously programmed on the blockchain. There is no flexibility at all. The system is programmed to perform an action(such as send money) once it's been triggered by a selected input (such as a confirmation of services is submitted). The system obeys its commands and only releases the cash under pre-programmed parameters.

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• A Smart Contract is Unstoppable. The smart contract system obeys its commands under all circumstances, so if the input is triggered, the output is going to happen – even if the input is triggered accidentally.

•A Smart Contract is Irreversible: If a smart contract is programmed to release a certain amount of cryptocurrency when an action is called, then it will do so. If you’ve accidentally sent the currency to the incorrect account there's not much you'll do to urge it back. Smart contracts introduce the notion of trustless ness– you don’t need to trust any third party to enforce or facilitate the contract. They rely on “oracles”.

An oracle is anything that feeds inputs into the blockchain and they are necessary for just about any smart contracts. And many of the smart contracts are hosted on the Ethereum, which allows the developers and coders to programme and code their own smart contracts. Challenges of smart contracts While smart contracts are promising as a technology which will revolutionize the legal and finance industries (among others) they're not without their challenges. Here are a number of the problems facing smart contracts:

• A Smart Contract is Cryptocurrency: most smart contracts operate using cryptocurrency, which is incredibly volatile – if the currency crashes mid-contract while the money is in escrow, one party has lost a lot of money.

• We don’t know yet the way to make smart contracts legally binding, especially since lawyers tend to keep faraway from programming and smart contracts are recorded on nodes (or Personal computers) across many jurisdictions, which makes them a bit tricky from a legal POV. 

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• And many people criticize smart contracts because they are so obstinate– the law is actually very flexible – judges set model and reverse contracts all the time – this cannot be done with smart contracts.

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