Introduced by Nick Szabo in 1993, smart contracts have become one of the increasingly popular blockchain technologies with the widespread use of the Ethereum network. These digital contracts running on the blockchain offer convenience in many ways. It is not costly and inefficient like traditional contracts. They are the kind of digital documents that can be easily edited by anyone.
What is a Smart Contract?
Smart contracts are contracts running on the blockchain that allow transactions between anonymous individuals to be made securely, subject to certain conditions. Smart contracts are irreversible, because of this feature, smart contracts create an environment of trust.
Thanks to smart contracts, the need for central authority is eliminated. Normally, when any transaction is to be made, the parties have the agreement they created approved by an institution of the state. Here, the element that provides the environment of trust is the state institution. When one of the parties commits an act outside the agreement, the other party is aware of the fact that he can legally access his rights thanks to the document he received from the state institution.
Smart contracts, on the other hand, achieve this trust by being transparent, traceable and irreversible. The agreement clauses kept in the codes are distributed across the entire blockchain. Thus, the agreement clauses are secured without the need for intermediaries.
What Does a Smart Contract Do?
In transactions carried out between individuals or institutions, certain conditions are set and a protocol is signed mutually. Doing business with people who do not know each other, who use anonymous identities, and who have more than one identity in the digital world, are open to problems because a reliable environment is not provided. No one wants to be involved in such business partnerships.
This is where smart contracts are a good solution. It is a digital protocol that reliably records the mutual fulfillment of certain conditions in cooperation between anonymous persons. Thanks to smart contracts, it is possible for the two parties to work by determining commitments without the need for them to know and trust each other.
Thanks to smart contract technology, human errors in contracts are eliminated. Thus, time and cost are also saved. These advantages will enable smart contracts to be used more widely in the coming days.
How Does a Smart Contract Work?
In smart contracts, first of all, anonymous parties determine the contract terms. The parties then stamp their cryptographic signatures to prove that the terms of the contract are accepted by both parties. The contract is added to the blockchain network and processed.
Smart contract technology works on the if-then principle. It actually has a very simple logic; the whole structure follows the “if this, then this” construct. When a certain condition in the contract is fulfilled, a task in the contract is performed. None of the actions taken can be reversed. The working principle of smart contracts allows transactions to be carried out without the need for supervision by a central authority. It helps make transactions more secure, transparent and scalable.
Where Are Smart Contracts Used?
Since smart contracts are a technology built around a simple architecture and open to change and customization, there is no restriction in the usage area. Smart contracts can be used in any area where contracts are needed. Among the current usage areas of smart contracts are many sectors such as insurance, real estate, finance, healthcare, energy, supply chain management, and public.
In the insurance sector, a large number of contracts are prepared between the parties on issues such as determining premiums, determining indemnity conditions, and making indemnity payments correctly. Transactions have been automated with smart contracts, thus saving time and money in the insurance industry.
Real Estate Sector
Real estate transactions can take quite a long time and it is checked manually whether the parties meet certain conditions. In order to speed up the slow-moving process and reduce costs, steps in real estate buying and selling such as payment terms and title deed transactions can be controlled and fulfilled automatically with smart contracts.
Smart contracts are used in the financial industry for execution of financial contracts and payments. In particular, smart contracts used in cryptocurrencies allow payment transactions to be carried out automatically, so that money can be transferred securely.
Health services include contracts between patients and health institutions. Smart contracts can be used, for example, to store medical records and specify payment terms for healthcare services. In this way, patient data can be stored securely and payments can be made automatically.
In the energy sector, smart contracts can be used to accurately measure and bill the energy consumption of consumers. In addition, there are projects developed for smart contracts to play a role in the use of renewable energy sources.
Supply Chain Management
Supply chain management covers the stages where products are produced and delivered to customers. Smart contracts are used to track products in supply chain management. It automates all steps in the production, transportation and delivery process, ensuring that transactions are carried out quickly, transparently and securely.
Many transactions in the public sector are done manually, going through lengthy bureaucratic processes. Many applications in the public sector are very inefficient in terms of time and human resources. By using smart contracts, it is possible to carry out many applications such as tax collection and patents in a shorter time and with less cost.
Risks of Smart Contracts
Using blockchain technology, smart contracts allow transactions to be executed without the need for a central authority to be audited. This technology helps make transactions more secure, transparent and scalable. As with any technology, the use of smart contracts also carries some risks. In order to benefit from smart contract technology efficiently, the risks it carries should be taken into account and measures should be taken or improvements should be made accordingly. The risks of smart contracts are as follows:
- Coding mistakes: Smart contracts can carry significant risks when the correct programming language is not used or coding mistakes are made. Coding errors can lead to misunderstandings, incorrect execution of functions, and thus errors in operations.
- Fixed protocols: : Once written, smart contracts are difficult to change. Therefore, it makes it difficult for applications to adapt to their changing needs in the future. If the software has unused or unnecessary features, they may remain fixed and pose a problem.
- Human factor: Writing and managing smart contracts depends on the human factor. Therefore, in the event of an error, the responsibility usually lies with the software developer or the person who wrote the contract. This requires businesses to monitor security vulnerabilities and provide updates.
- Application risks: The use of smart contracts can reduce risks in transactions. However, there are still some risks. For example, a business or application may be hacked, fraud may occur, and disputes may arise between the parties as a result of misunderstanding the terms of the contract.
Being aware of these risks and taking the necessary precautions to minimize them is important to ensure the safe use of smart contracts.
The Future of Smart Contracts
The future of smart contract technology looks bright. Blockchain technology, as a rapidly spreading technology, attracts more and more businesses every day. Nowadays, smart contracts are used in financial transactions, real estate sector, health sector to increase reliability, efficiency and accessibility. Efforts are being made to integrate smart contracts with IoT devices, helping to create smarter devices such as smart home systems or autonomous vehicles. In short, smart contract technology offers many opportunities to make people’s lives easier.
There are also some concerns about the future of smart contracts. Issues such as how this technology will affect our legal system and how much it will change people’s professions have been the subject of discussion. There are also concerns about the misuse of smart contracts. There are also ethical issues, privacy issues and the risk of cyber attack in the development of this technology.
In summary, the future of smart contract technology looks bright. They may become more common in the future and can lead to significant changes in many industries. However, the possible risks of this technology should also be considered and studies should be carried out to minimize these risks.