What Are Smart Contracts?
Smart contracts are a way of automating transactions between parties. They use special algorithms that allow people to exchange goods and services digitally without the need for third parties services like brokers, agents, or notaries. This is a great advantage to the individual who values autonomy. Unlike more traditional means of exchange, smart contracts make use of cryptocurrency which is decentralized meaning companies or governments cannot produce new units. Smart contracts work in much the same way as any other contract. They establish the rules or guidelines of a given transaction They help people to make exchanges of good and services in a commonly agreed upon manner. They establish order. The difference, then, in a regular contract and a smart contract lies in how these exchanges are executed. With a smart contract, a software program is used to collect the currency that is being exchanged. In practical terms, a smart contract is a way for computers to make transactions.
With the use of smart contracts on the rise in recent years, and more in the news in recent months, people are beginning to ask questions about how all of this works and if it is secure. The question becomes, how do these contracts actually work and can they or should they be trusted. In many cases, people are uneasy with the idea of exchanging currency online. Even with established companies that have been in business for years, there can be times when security is breached, and customer information is leaked. This adds to the insecure feeling that people get when you begin to discuss smart contracts or cryptocurrency. This fear can be allayed over time with continued exposure to the idea and a better understanding of its place and purpose.
How do Smart Contracts Work in Blockchain?
A blockchain is a list of records. These records, once recorded, are permanent and cannot be changed. This make them a safe and reliable way to create transactions between two parties. These blocks are managed by a peer-to-peer network that holds to a specific protocol for validating new blocks. The consistent and reliable nature of blockchains make them the perfect platform for the use of smart contracts. Smart contracts can be encoded onto any blockchain. Since blockchains are predicated on if-then statements, smart contracts can be setup to only execute when certain conditions are met. For example, you can create a contract that distributes funds to an individual once they have completed a task you employed them to complete. This is an enormously efficient and reliable way to conduct transactions as it eliminates many of the errors that are involved with traditional exchanges. The application for this type of contract is growing and expanding quickly. The implications are not yet fully understood, but the potential is enormous.
Even with the secure nature of smart contracts, there are still concerns and potential problems. No system is perfect. It is important, then, to identify some of the leading concerns with this type of transaction. While once the contract is completed, it is very secure, during the process of completion there is a risk of information being leaked to parties outside of the transaction. Additionally, there is some risk of hackers being able to access and change the code used to write the smart contract thereby changing the outcome. While these are real issues that could arise, this system is as secure and maybe more secure than other types of exchanges. There will always be risks, but these are worth taking.
Where Can Smart Contracts Be Applied
Smart contract can be used anywhere. The consistent and reliable nature of these contracts have proven to increase the trust of the end user. This is especially useful in the expansion of free markets across various locations and cultures. Whereas some people might be hesitant to enter into transactions with people outside of their geographical areas due to various types of laws and forms of government that regulate traditional currency, using smart contracts and cryptocurrency can eliminate these concerns. Since traditional contracts rely on trusting the other party there can be some hesitation. The secure nature of cryptocurrency eliminates this concern and opens the markets to a wider number of people around the world.
The greatest obstacle currently facing the expanded use of smart contracts and cryptocurrency is education. Once people understand the secure nature of this method, they will learn to embrace it further. You don’t have to be a programmer or a genius to use smart contracts. In fact, many have already used them perhaps without even knowing the term. A common way of explaining this type of transaction to people is the vending machine example. It has been said that smart contracts are similar to the self-executing contract that consumers participate in when they place their money in a vending machine. They select a product at an agreed upon price and once the funds are deposited, the product is released. This is the same way that smart contract works. Once this is understood and accepted, they will continue to grow in popularity and the process will become more established and mainstream.
Although, smart contracts are still primarily used in the exchange of goods and services, they are not limited to this. They can be used for such things as crowdfunding, auctions, multi-signature wallets, and some have even suggested using them for voting. This is something that will probably always be up for debate since as we have seen no system is completely secure. Voter fraud can happen in many different ways. Still, this would require a great deal of time to educate the public, it could be something that is normal in the future. For now, it seems, these smart contracts are actually best used to employ simple, agreed upon, transactions between parties that are willing to trust the security and anonymity that these smart contracts provide.