Experts across the world agree that blockchain is, by far, the most potent technology to have hit global enterprises. Smart Contracts are possibly the most critical building block of this ubiquitous technology, but the complexities of the architecture are often daunting for beginners. Here’s a closer look:
Blockchain, largely hailed as the most pervasive technology to have hit the world since data science, is largely considered the sum of its components. In this case, Smart Contracts, or pre-programmed conditional and executable digital contracts, are all set to define transactions across businesses, individuals and even governments. The term was first coined by it’s creator Nick Szabo, one of the members of the cypherpunk movement, and one of the pioneers of cryptocurrencies in the world.
A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives
are to satisfy common contractual conditions.- Nick Szabo
While this may sound very technical, smart contracts, in principle, are fairly simple and have a wide range of applications in transaction processing. So much so, that businesses, banks, individuals and even government agencies are beginning to use smart contracts to ensure foolproof, secure and fast transaction processing, for almost any kind of transactions. But before moving into implementation, it’s first necessary to understand the fundamentals that make smart contracts a universally applicable technology.
Note: While smart contracts can be built using most programming IDE’s, the explanations here are based on the Ethereum platform, currently the world’s leading blockchain application development platform.
At the very basic, a smart contract is a self-executable program residing on a blockchain, that executes when preset conditions are met. They are immutable, auto-enforcing and don’t require additional verification. Think of it like a safe that is locked and conditioned to release its contents once certain conditions are met. In this case, the specifications of the conditions are indelible, irreversible and are recorded on a decentralized blockchain. Functioning primarily on the IFTTT (If This Then That) principle of programming, smart contracts eliminate the need for intermediaries and bring about additional layers of security and high transaction processing speeds.
For any transaction, the party and counter-party can code a smart contract to execute once all their pre-conditions for the transaction are met. In this case, the smart contract will execute for, say, releasing a payment or an asset, while recording the transaction on the blockchain that can be easily verified.
In the case of the Ethereum blockchain, smart contracts can be either created by a command line on the Ethereum blockchain or by using the Remix browser based smart contract creation interface. The Ethereum blockchain uses the Solidity programming language and the Ethereum blog provides more than sufficient documentation on how to create and execute smart contracts on the Ethereum, blockchain using a few lines of code.
Smart contracts have gained favor over most others in terms of transaction execution. While crypto currencies have been the mainstay of blockchain technology so far, businesses are increasingly exploring opportunities in the segment and are investing heavily in it, and smart contracts are one of the biggest and most significant sub-segment of the technology that is drawing attention from the big boys in the corporate world. But why are enterprises across industries including legal, healthcare, banking, real estate and logistics investing so heavily in developing their smart contract capabilities and mechanisms? Primarily because:
Smart Contracts eliminate the need for a third party intermediary between both parties to a transaction. This not only saves on the “escrow costs”, it also provides both parties complete control over the transaction.
Encrypted on a decentralized database, smart contracts provide unprecedented security and reliability that forms the foundation for blockchain technology itself. Furthermore, verifiability at any point in time translates essentially into a matter of trust between the parties to the transaction.
Smart contracts, being self-executable, provide unparalleled efficiency in transaction processing at scale. This is probably the biggest industry application where contracts between customers and suppliers are complex and require extensive resources. This is primarily the area smart contracts are set to completely revolutionize in the short term, as more use cases come to the front and smart contracts, as a core component of the imminent blockchain revolution, sweeps across the planet.