Aside from cryptocurrency, “smart contract” is probably the next most-used phrase you’ll encounter in discussions of blockchain technology. Simply put, a smart contract is a program stored on the blockchain that runs when certain predetermined conditions are met.
Smart contracts are often used to automate the execution of an agreement between several parties, hence the ‘contract’ part. While a paper contract legally compels participants to act in prescribed ways and fulfill certain responsibilities, interested parties must trust each other and spend time (and likely money) on verification and intermediaries. The smart contract does all this automatically, eliminating risk, saving time, cutting down on bureaucracy, and notifying all participants immediately. Smart contracts are also used to speed up workflows. A chain of smart contracts can execute one task after another when the necessary conditions are met, streamlining a work process between multiple participants who may be in different time zones, speak different languages, etc.
How Smart Contracts Work
Smart contracts are structured with logic statements, implemented in languages such as Solidity or Rust (derivates from C), coded onto a blockchain, which are triggered when a transaction is initiated. Smart contract development can be complex, as the various stipulations must be agreed on and exceptions, edge cases, and disputes must be accounted for. However, specialized teams of blockchain developers may be hired to develop bespoke smart contracts, modify templates for others or offer interfaces and tools for building them.
The network of computers on the blockchain verifies the conditions in a similar way to how cryptocurrency is verified. Because of the decentralized nature of the network, it is extremely difficult for one participant or an outside party to falsify any information on the blockchain. The network then executes the programmed action. This could include remuneration, such as releasing funds (including cryptocurrencies) to the appropriate parties for services rendered; verification, such as sending notifications to confirm a task is completed; approval of a loan; granting access to a database; or the simple issue of a ticket or registration number. The execution of the smart contract, including any related transaction, is recorded on the blockchain upon completion, once more making it impossible to reverse.
How Smart Contracts Are Used
Various industries already use smart contracts to make complex, multi-participant activities faster and more efficient. These include, but are not limited to:
- Governance systems Because of the extreme difficulty of manipulating a blockchain and the level of encryption involved, smart contracts provide a secure environment for voting systems. This can be used by governments, company shareholders, or by decentralized organizations such as a collective or group of collaborators who desire a less hierarchical, more peer-to-peer method of organizing a project. Because of automatic execution, voters can be assured that the result voted on will be carried out.
- DeFi DeFi, or decentralized finance, refers to the use of blockchain technology to improve upon traditional financial services. Smart contracts play a crucial role in this. For example, checking insurance claims, loan applications, mortgages, payment for services rendered, etc. Smart contracts streamline bookkeeping and secure the accuracy of accounting records, make sure that transactions are executed in a timely manner, and eliminate the need for intermediaries and manual verification.
- Supply chain and inventory Supply chains, or any system that requires a high level of bookkeeping, can benefit from a blockchain that shares an accessible and secure digital record of activities inventory to all parties. This cuts down on falsification, human error, and time spent on manual checking.
Why Smart Contracts Are Important
Smart contracts bring several important advantages to businesses that adopt them, including:
Automation eliminates the need to spend time and labor on paperwork, filling out forms, checking and carrying out transactions manually, checking and correcting mistakes, etc. Because there is no need for intermediaries to facilitate transactions, money is saved on fees.
As the result of operations ruled by smart contracts are stored in blockchain transaction records, which are encrypted and extremely difficult to hack, security is granted. Multiple backups are also created automatically on the blockchain, safeguarding work from accidental data loss.
Smart contracts also reduce risk because they eliminate the need for trust within disparate parties. All participants can access encrypted records of transactions, without the possibility of tampering.
Crafting Smart Contracts for Your Business
At AccelOne, our nearshore software development team is experienced in developing software that enables businesses to integrate blockchain and smart contracts into their operations. Our developers and QA engineersQA engineers have a proven track record in creating blockchain solutions for industry-leading companies.To learn more about how we can help you streamline your business using smart contracts, contact us online or call 800.863.6814.
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AccelOne is an industry leader in custom software development services across the entire software product development lifecycle. AccelOne uses a hybrid approach with experienced onshore/nearshore professionals located in the Americas.