What are Smart Contracts and How do They Work?

by | Dec 23, 2020 | Blockchain | 0 comments

The concept of smart contracts antedates the conception of Bitcoin ten years ago. Nevertheless, it was the introduction of Ethereum in 2014, with programmable blockchain logic, which brought the concept to life. Nowadays, this programmable logic, widely known as “smart contracts,” enables people to apply blockchain technology in various sectors. This article explains what smart contracts are and how they work. 

What is a Smart Contract? 

A smart contract is a self-executing contract with terms of the agreement between two or more parties directly written into code lines. The code and the agreement contained in the smart contract run on a distributed, decentralized blockchain network. The code governs its execution, and transactions are trackable and irreversible.   

Smart contracts facilitate trusted transactions and agreements among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. 

How do Smart Contracts Work? 

Smart contracts have brought the possibility to create any token without having to launch a completely new blockchain. The Ethereum blockchain’s introduction made a token to become a piece of code- a smart contract- with particular functions, such as enabling the “transfer” of cryptocurrencies and the ability to “read” the account information of token holders. 

You can create escrow agreements or futures based on the occurrence of particular conditions to be released. For instance, you can program a smart contract to release funds for your loved one’s birthday every year. You can also program it to release payment once your business partner confirms receipt of delivered goods or services. A smart contract can be applied to enforce specified rights for holders of digital currencies. 

The Advantages and Disadvantages of Smart Contracts 

Smart contracts provide a myriad of benefits when you deploy them accordingly. They enable people from all parts of the world to transact with one another without an intermediary, minimizing the costs spent on intermediaries and brokers. 

Since smart contracts eliminate third parties from the equation, there is no risk of manipulation. Besides, smart contracts minimize administration costs and save time since the process is automated. They also bring complete autonomy, and since everything is backed up on the network, smart contracts do not suffer from data loss. 

The significant disadvantage of smart contracts is that they are irreversible. If a smart contract code contains bugs, illegal transactions can take place. Unfortunately, you cannot undo such transactions. 

Practical Applications of Smart Contracts 

Tokenization of real-world assets may require individual investors to have certain rights. You can code these rights into a smart contract. For instance, if company stocks are tokenized, shareholders have voting rights. With the use of a smart contract, the shareholder’s right to vote is granted. 

The smart contract allows them to cast their vote and keeps records of the whole process transparently. Therefore, it facilitates remote voting, relieving shareholders from the requirement to be physically present. 

You can still apply smart contracts in the insurance industry, supply chain and logistics, healthcare, IoT, digital identity, business process management, and more. These are just a few use cases of smart contracts. Indeed smart contracts have opened up a world of possibility for the numerous blockchain applications we enjoy today. As technology evolves, it is definite that smart contracts will become an integral part of our daily lives. 

Tokenizer Blockchain Banking Platform

Tokenizer is a blockchain investment banking system that champions accessible, transparent, and safe financial services. We believe that everyone deserves equal access to investment and fundraising opportunities. That is why we are democratizing access to capital for investors and fundraisers by making investing and fundraising efficient, safe, and accessible to everyone.

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