What Are Smart Contracts? A Detailed Guide for Beginners

Blockchain technology is a heart of the most popular cryptocurrencies on the current market. This decentralized system allows users to make fast and secure transactions without any mediators and controlling instances. The blockchain is based on the protocol named smart contract, which ensures transparency and safety of all transactions you make.

Smart contracts may be described as a vending machine: in the reality, you would ask a notary or a lawyer to control the transactions and pay an additional charge to them. Smart contracts allow you to avoid participation of anyone else except a person you make a deal with. All the agreements between users are verified and controlled by the mechanism, which also defines penalties and rules around the deal. It may sound similar to traditional contracts, it is, the main difference is that this technology assigns the obligations automatically. Automated processes ensure that the system functions in the proper and safe way. Smart contracts follow the rules of the deal and decide the asset’s movement.

How does it work?

Let’s say, you are making a purchase and do this through the blockchain by sending cryptocurrency to a seller. You get an acknowledgment which is located in our digital contract and a seller gives you a digital key which comes to a specific time. If the key fails to come on time, the blockchain automatically does a refund. In a word, the system functions on the “if-then” principle and ensures faultless delivery of funds. If you send a correct amount of money, you get a key. If you give a key to someone, be sure that he/she will be paid.

Smart contracts can be used for all types of operations, from financial derivatives to legal process and property law.

Here is an example of how a smart contract code looks like:

The smart contract code sample

Smart contracts can be used in a wide range of spheres

  • Management

Blockchain serves as a source of trust and allows the workflow to go in the proper way due to its automated and transparent system. As a rule, business operations endure back and forth and have to wait for approvals for issues to be sorted. On the contrary, a blockchain streamlines the process.

  • Government

Smart contracts and blockchain technology as a whole may be used for the voting system, providing more security. The votes protected by smart contracts need to be decoded which requires significant computer powers and there are no chances that any hacker may have such a strong machine.

  • Vehicles

The progress moves to robotizing most devices we use in our daily life and strives to make everything as automated as possible: from smartphones to smart cars. Here, smart contracts are helpful, too. For instance, contracts can allow self-parking vehicles, where smart contracts can detect the movement of a car and even determine who was guilty in an accident.

  • Healthcare

Blockchain can also be used as a storage for health records which would allow access only to a restricted number of people. Also, this technology ensures that research is conducted in a confidential and secure way. The smart contracts can be used to manage all healthcare issues like testing results, supervising drugs, and managing supplies.

What can smart contracts provide?

  • Trust

Smart contracts encrypt your documents and there is no way someone can access it without your permission.

  • Autonomy

You don’t have to rely on anyone, making a deal. No brokers, lawyers or other third parties take part in the process. Therefore, there is no risk that anyone can control and manipulate the operations since all transactions are managed automatically.

  • Backup

Your documents are duplicated and there is no risk that your savings will get lost.

  • Speed

It takes time to process the documents manually, however, smart contracts use algorithms to automate tasks, therefore all financial and management processes take less time.

  • Safety

Your documents are kept safe due to cryptography. As we have already mentioned, the risk of hacking is almost impossible, since it requires enormous computing powers.

What are the perspectives of smart contracts?

Some experts say that smart contracts will enter our everyday life very soon, while the others say that this technology is a step towards a sci-fi screen.

For instance, smart contracts may become a part of the law industry to let lawyers transfer from traditional manually-written contracts to smart contract templates. Other spheres like credit companies, merchant contracts, and accountants may also adopt smart contracts for the real-time audit.

Smart contracts do have perspectives. Chances are that they will turn into a hybrid of digital and paper content where deals are supported by physical copies and verified by smart contracts. In a word, there is no end to the number of industries this technology can impact and the list continues to grow.

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