Understand Blockchain and Smart Contracts (2/2)

What is a Smart Contract?

How exactly do smart contracts work?

“IF Alice pays Bob 30 Ether, THEN Alice will receive full ownership of the car.”

What is happening behind the scenes?

What are the main advantages and disadvantages of smart contracts?

  • Autonomy — You are the one who makes and controls the agreement, and as it was said, it executes automatically and immediately on the blockchain, eliminating the need for third parties as intermediaries.
  • Reduced cost — Speaking of third parties, since they are not necessary when using smart contracts, you save all the money that would otherwise be used on lawyers, brokers, etc.
  • Safety/Trust — All the safety and security mechanisms of the blockchain play in the favor of smart contacts, to make an unmodifiable and immutable solution.
  • Speed — Smart contracts on the blockchain are automated, shaving a lot of time when compared to a more traditional process with lots of paperwork involved.
  • Transparency — The conditions on the contract are visible and easily accessible by the participants.
  • Reliability — Since the smart contract is saved on various nodes on the blockchain, your documents are never lost.
  • Accuracy — Smart contracts are not only faster and cheaper, but they are also a good way to avoid any human mistakes that could’ve happened during the process.
  • Difficult to change — The unmodifiable aspect of the blockchain and of smart contracts can be both a blessing and a curse. While it does provide security and safety, if for example there is an error on the code of the contract, the process of fixing that error can be time-consuming and expensive.
  • Translation into code — Contracts can include terms that are not always fully understood. Smart contracts are not always able to handle terms and conditions that are vague.
  • Third parties — This one may seem contradictory, since one of the main benefits of smart contracts is the elimination of third parties. However, the issue is more complicated than it seems. It may get rid of the need for brokers or other intermediaries to confirm the agreement, but sometimes, for example, layers may still be needed by developers to understand the terms in order to create the code for smart contracts. Third parties may assume different roles from the ones they take in traditional contracts.

How are smart contracts being currently used?

  • Insurance Companies — Some companies have already started using smart contracts as a way to implement insurance policies. For example, let’s say take the example of guarantee insurance, that covers the loss that can arise from dishonesty, disappearance, etc. Essentially, it compensates customers if they do not receive a desired service or product. In this case, let’s say that the insurance company creates a smart contract and sends $250 to it, and the customer sends $50, making a total of $300. If the customer does end up receiving the service or product, the smart contract sends the insurance company the $300, otherwise it would be sent to the customer in order to compensate for their loss. This approach saves time and money, and both parties can be 100% sure that if their condition is met, they will get the money automatically.
  • Supply Chain — Supply chain is an area that suffers a lot from paper-based systems that slow down the process and introduce the risk of loss and fraud. Smart contracts can be used as a way to mitigate these issues. By providing a secure, digital version to all parties involved, and by automating tasks and payments, then we can do things like triggering the creation/order of a product in the supply chain after a delivery of some finished product at the end of the chain.
  • Business Management — One way that businesses can use smart contracts is to automate the payment of their employees. Examples can be as simple as “WHEN we reach the end of October, THEN send John 2 Ether”. John will always be paid on time, no more no less, and the business does not need to worry about anything.
  • Healthcare — Health systems can use smart contracts to safely store and transfer patient records, allowing no access to third parties. The patients are therefore given full control of their data: if, for example, researchers want to use their data, not only do they have to pay for it, but even then the final decision would be up to the patient, according to if they want to sell it or not.
  • Governments — Smart contracts constitute a way to make voting systems less susceptible to manipulation. Moreover, it could increase the actual number of voters, because it contributes to eliminate or at least improve the slow process that is required in some countries for someone to vote.

“Can I make a smart contract??”





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Eduardo Ribeiro

Eduardo Ribeiro

MSc Software Engineering Student from Porto, Portugal.