What is a smart contract?
Based on the blockchain technology, a smart contract is software that stores the terms and conditions of the contract, automatically verifies if they are fulfilled and executes the terms of the agreement. They are self-executing and validating digital contracts that do not require any third parties for their execution. The terms and conditions of the contract are built on the code of blockchain technology which is distributed and decentralized across network. Hence, any transactions carried under smart contracts are traceable, accountable by the parties involved and irreversible.
Why do we need smart contracts?
The key elements of business relationships are contracts and transactions. Traditionally, parties have been entering into contract over the agreed terms and conditions in the presence of a third party which oversees their conformance to the contract. In this context, the third party is usually banking or legal entity or any government agency. This is a very traditional and centralized model in which businesses function. However, the successful implementation of the contract stands on the premise that the third party will ensure its full implementation. But, commonly, the third party cannot assure the same; apparently, making it a risky proposition for the customers.
Now, moving away from the centralized mode is the smart contract which is a decentralized system based on blockchain technology. The crucial idea behind smart contract is
- Negate the dependency of a third party while forging business alliances
- And facilitate the direct interaction between the contracting parties.
Advantages of smart contracts
From to one to many, the advantages of the smart contracts are as interesting as they are advantageous.
- Tamper proof: Since the smart contract is saved inside the blockchain and maintained in a distributed manner, no party can claim or possess control over the money in the system.
- Irreversible: One of the biggest advantages of smart contracts are these contracts cannot be changed. Hence, there is absolutely no room for tampering with the rules of the contract.
- Validated by all: Since it is distributed, the results of the contract are validated by everyone in the network. Thus, no party can influence or get influenced to act in a certain way.
- Traceable: They can be traced, transparent as all transactions are visible to everyone in the network and irreversible.
The growing popularity of smart contracts has already found its implementation in several industries such as