What is a smart contract?
A smart contract can be defined as a computerised transaction protocol which automatically executes the terms of a contract when certain conditions are met. Stored within a blockchain such as Ethereum, smart contracts allow for the contract to be executed without the need for intermediaries or human intervention, minimising fraud losses, arbitration and enforcement costs, and malicious and accidental exceptions.
Where have you heard of smart contracts?
Given their reliance on blockchain technology, the concept of smart contracts will be familiar to those within the blockchain industry. Advocates of blockchain projects like Ethereum often discuss the potential uses for smart contracts in everyday life, such as in data storage, peer-to-peer transactions, identity verification and the facilitation of insurance claims.
What do you need to know about smart contracts?
How do smart contracts work? Smart contracts work in a similar fashion to regular contracts – they are simply faster, more secure, more cost-efficient, and not dependent on middlemen.
A simple analogy that can be used to understand how smart contracts work is to compare the smart contract to a vending machine. Vending machines are programmed to dispense products when certain conditions are met:
Insertion of money + product selection = Product dispensed
If a user does not input enough money or fails to select a product, the vending machine will not dispense a product, because the conditions within the machine’s programming have not been fulfilled. But if these conditions are met, the vending machine executes the action of releasing the product, fulfilling the agreement.
What are the pros and cons of smart contracts?
While smart contracts definitely have numerous advantages over traditional contracts, they are not without flaws or risks.
Fully automated. Contracts are executed automatically once the conditions are met, with no need for human intervention
Fast. Transactions can be settled faster than normal contracts due to the lack of intermediaries
Trustless. A trustless system allows a contract to be fulfilled with no need for trust between the engaging parties. As smart contracts automatically execute once the conditions are met, participants can remain anonymous and still be sure that the contract will be fulfilled
Transparent. The advantage of blockchain technology is that anyone can view the information on the network
Like any computer software, smart contracts can be susceptible to computer bugs or malicious attacks
Minimal legal regulation
Terms of the contract cannot be altered once it is created
Real-world smart contract examples
Insurance company AXA is one example of a business that has trialled using smart contracts.Their product, named Fizzy, used smart contracts to provide customers with direct, automatic compensation in the event that a scheduled flight was delayed by two or more hours.
Music streaming platform Inmusik allows the use of smart contracts to ensure fair allocation of revenue earned through streaming. Ownership rights to a song are validated through the Inmusik blockchain, and revenues are allocated accordingly.
Factom is a blockchain development company that aims to revolutionise the way patient information is stored within the healthcare industry. By storing medical data within the blockchain, information is accessible only by hospitals and healthcare administrators, greatly enhancing the security of confidential information.
ATLANT is a blockchain company which looks to facilitate the tokenisation of assets, meaning the issuing of a digital token which represents a physical asset such as a work of art or a property. Once tokenised, these assets can be traded in a similar fashion to stocks and shares, allowing transactions to be completed online.