What Are Smart Contracts?

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Table of contents

  1. Empty
  2. What Is a Smart Contract?
  3. How Does a Smart Contract Work?
  4. What Is the Purpose of a Smart Contract?
  5. What Are the Limitations of a Smart Contract?
  6. What Are Some Uses of Smart Contracts?
  7. Conclusion

Empty

{"blocks":[{"key":"8a3er","text":"Among the advancements of the 21st century is the concept of blockchain technology, cryptocurrencies, and smart contracts—all of which were invented to facilitate otherwise complicated transactions.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":198,"style":"color-rgb(0,0,0)"},{"offset":0,"length":198,"style":"bgcolor-transparent"},{"offset":0,"length":198,"style":"fontsize-11pt"},{"offset":0,"length":198,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"c5qdd","text":"Below, the main focus will be on smart contracts. To be more specific, this article will answer questions such as what are smart contracts and how do they work? Additionally, it’ll talk about what benefits smart contracts bring and what their limitations are too.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":263,"style":"color-rgb(0,0,0)"},{"offset":0,"length":263,"style":"bgcolor-transparent"},{"offset":0,"length":263,"style":"fontsize-11pt"},{"offset":0,"length":263,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

What Is a Smart Contract?

{"blocks":[{"key":"4ngon","text":"A smart contract is a completely digitized version of a traditional contract. Not only does a smart contract self-execute, but it also eliminates the need for a third party to be present.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":187,"style":"color-rgb(0,0,0)"},{"offset":0,"length":187,"style":"bgcolor-transparent"},{"offset":0,"length":187,"style":"fontsize-11pt"},{"offset":0,"length":187,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"c3h9n","text":"Smart contracts were first introduced by Nick Szabo. He’s an American computer scientist and cryptographer who called for the notion to code written contracts. At the time, which was during 1994, the technology to carry out such a task wasn’t yet invented.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":256,"style":"color-rgb(0,0,0)"},{"offset":0,"length":256,"style":"bgcolor-transparent"},{"offset":0,"length":256,"style":"fontsize-11pt"},{"offset":0,"length":256,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"9tkb9","text":"In 2009, however, when blockchain technology was created by the anonymous identity Satoshi Nakamoto, the idea of a smart contract became possible. Interestingly, this is why some rumors point out that Nick may be the real Satoshi Nakamoto.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":239,"style":"color-rgb(0,0,0)"},{"offset":0,"length":239,"style":"bgcolor-transparent"},{"offset":0,"length":239,"style":"fontsize-11pt"},{"offset":0,"length":239,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"1jipq","text":"Is a Smart Contract Legally Binding?","type":"header-three","depth":0,"inlineStyleRanges":[{"offset":0,"length":36,"style":"color-rgb(67,67,67)"},{"offset":0,"length":36,"style":"bgcolor-transparent"},{"offset":0,"length":36,"style":"fontsize-14pt"},{"offset":0,"length":36,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"5ha5r","text":"This is an important follow-up question. The short answer is: a smart contract isn't always legally binding. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":109,"style":"color-rgb(0,0,0)"},{"offset":0,"length":109,"style":"bgcolor-transparent"},{"offset":0,"length":109,"style":"fontsize-11pt"},{"offset":0,"length":109,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"cn57j","text":"Smart contracts are only considered legal if their terms and conditions comply with contract law. Otherwise, a smart contract isn’t legally enforceable.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":152,"style":"color-rgb(0,0,0)"},{"offset":0,"length":152,"style":"bgcolor-transparent"},{"offset":0,"length":152,"style":"fontsize-11pt"},{"offset":0,"length":152,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"5sbd7","text":"That being said, there exists a kind of smart contract that’s perfectly legal under all conditions. They’re known as smart legal contracts and the law considers them legally binding agreements that can hold up in court.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":219,"style":"color-rgb(0,0,0)"},{"offset":0,"length":219,"style":"bgcolor-transparent"},{"offset":0,"length":219,"style":"fontsize-11pt"},{"offset":0,"length":219,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"5i2mf","text":"Smart legal contracts don’t always use the blockchain mechanism, as opposed to smart contracts. Often, smart legal contracts are coded using traditional software. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":163,"style":"color-rgb(0,0,0)"},{"offset":0,"length":163,"style":"bgcolor-transparent"},{"offset":0,"length":163,"style":"fontsize-11pt"},{"offset":0,"length":163,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

How Does a Smart Contract Work?

{"blocks":[{"key":"4mql4","text":"Smart contracts use blockchain technology, meaning, the entire contract with its terms and conditions is written out in computer code. Once a term is fulfilled, a smart contract will self execute and perform the agreed-upon action for completing the condition. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":262,"style":"color-rgb(0,0,0)"},{"offset":0,"length":262,"style":"bgcolor-transparent"},{"offset":0,"length":262,"style":"fontsize-11pt"},{"offset":0,"length":262,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"brkuj","text":"If that sounds too technical, think of smart contracts how Nick Szabo describes them. The original mind behind this invention compares a smart contract to a vending machine. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":174,"style":"color-rgb(0,0,0)"},{"offset":0,"length":174,"style":"bgcolor-transparent"},{"offset":0,"length":174,"style":"fontsize-11pt"},{"offset":0,"length":174,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"6f4go","text":"Vending machines work on the basis that you hand it money before you insert the code for your desired snack. This condition needs to be met first before the machine can hand you what you want. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":193,"style":"color-rgb(0,0,0)"},{"offset":0,"length":193,"style":"bgcolor-transparent"},{"offset":0,"length":193,"style":"fontsize-11pt"},{"offset":0,"length":193,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"ct30u","text":"Similarly, smart contracts can’t perform their intended function until one of their terms is realized first. As soon as the code for a term goes through the contract’s blockchain, a smart contract will carry out its purpose. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":225,"style":"color-rgb(0,0,0)"},{"offset":0,"length":225,"style":"bgcolor-transparent"},{"offset":0,"length":225,"style":"fontsize-11pt"},{"offset":0,"length":225,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

What Is the Purpose of a Smart Contract?

{"blocks":[{"key":"9fa08","text":"The main intention behind inventing a smart contract was to eliminate the involvement of middlemen. The purpose of such third parties was to facilitate the execution of contract-based agreements held between two sides.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":218,"style":"color-rgb(0,0,0)"},{"offset":0,"length":218,"style":"bgcolor-transparent"},{"offset":0,"length":218,"style":"fontsize-11pt"},{"offset":0,"length":218,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"1alli","text":"However, having a middleman present is both time-consuming and expensive. Not only that, but the signatory might be at risk of being tricked since third parties often are untruthful. Some middlemen seek only what best suits their agenda.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":237,"style":"color-rgb(0,0,0)"},{"offset":0,"length":237,"style":"bgcolor-transparent"},{"offset":0,"length":237,"style":"fontsize-11pt"},{"offset":0,"length":237,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"1h2qr","text":"With smart contracts, worrying over delays, costs, and fraud is unnecessary. A smart contract requires only both parties to be present and to agree on the coded terms. Afterward, you’re guaranteed that your end of the agreement is carried out every time a term is digitally met.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":278,"style":"color-rgb(0,0,0)"},{"offset":0,"length":278,"style":"bgcolor-transparent"},{"offset":0,"length":278,"style":"fontsize-11pt"},{"offset":0,"length":278,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

What Are the Limitations of a Smart Contract?

{"blocks":[{"key":"acha7","text":"As with most technologies, smart contracts are yet to be perfected. On the bright side, though, there are only a few downsides to look out for when using a smart contract.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":171,"style":"color-rgb(0,0,0)"},{"offset":0,"length":171,"style":"bgcolor-transparent"},{"offset":0,"length":171,"style":"fontsize-11pt"},{"offset":0,"length":171,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"6968f","text":"For starters, it’s pretty difficult to change a smart contract. It’s also why it’s near impossible to hack one too. This is mainly because smart contracts are made up of insurmountable codes that use blockchain technology to function.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":234,"style":"color-rgb(0,0,0)"},{"offset":0,"length":234,"style":"bgcolor-transparent"},{"offset":0,"length":234,"style":"fontsize-11pt"},{"offset":0,"length":234,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"8hkj0","text":"So, in other words, if you want to change a term in your smart contract or if you find an error in one of the codes, it’d be a costly issue.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":140,"style":"color-rgb(0,0,0)"},{"offset":0,"length":140,"style":"bgcolor-transparent"},{"offset":0,"length":140,"style":"fontsize-11pt"},{"offset":0,"length":140,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"38r0v","text":"Another one of a smart contract’s shortcomings is the limit on how ‘smart’ it can be, meaning, these contracts aren’t yet designed to handle complex conditions. Some terms are too vague to be turned into computer code, and for those that can, a smart contract may not always be able to execute them as desired.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":310,"style":"color-rgb(0,0,0)"},{"offset":0,"length":310,"style":"bgcolor-transparent"},{"offset":0,"length":310,"style":"fontsize-11pt"},{"offset":0,"length":310,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"du5s2","text":"This in turn leads to other problems, such as the possibility of the other party finding a loophole in the contract for them to personally gain from. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":150,"style":"color-rgb(0,0,0)"},{"offset":0,"length":150,"style":"bgcolor-transparent"},{"offset":0,"length":150,"style":"fontsize-11pt"},{"offset":0,"length":150,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

What Are Some Uses of Smart Contracts?

{"blocks":[{"key":"fqu62","text":"Many countries have started implementing smart contracts to replace the old, paper-based ways of getting something done. Although their legal validity is still up in the air, this fact hasn’t stopped governments from seeing the effectiveness of smart contracts.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":261,"style":"color-rgb(0,0,0)"},{"offset":0,"length":261,"style":"bgcolor-transparent"},{"offset":0,"length":261,"style":"fontsize-11pt"},{"offset":0,"length":261,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"cb21k","text":"Keeping that in mind, here are two instances in which smart contracts are currently being used:","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":95,"style":"color-rgb(0,0,0)"},{"offset":0,"length":95,"style":"bgcolor-transparent"},{"offset":0,"length":95,"style":"fontsize-11pt"},{"offset":0,"length":95,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"dlofe","text":"The Voting System","type":"header-three","depth":0,"inlineStyleRanges":[{"offset":0,"length":17,"style":"color-rgb(67,67,67)"},{"offset":0,"length":17,"style":"bgcolor-transparent"},{"offset":0,"length":17,"style":"fontsize-14pt"},{"offset":0,"length":17,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"aaj75","text":"Smart contracts ensure that only one vote is allowed per citizen. They also prevent the manipulation of votes since everything is ledger-protected.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":147,"style":"color-rgb(0,0,0)"},{"offset":0,"length":147,"style":"bgcolor-transparent"},{"offset":0,"length":147,"style":"fontsize-11pt"},{"offset":0,"length":147,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"8g7pr","text":"Since smart contracts require no legwork, using them to vote might increase the number of participants. In light of the Covid-19 pandemic, this solution has come in quite handy for most governments. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":200,"style":"color-rgb(0,0,0)"},{"offset":0,"length":200,"style":"bgcolor-transparent"},{"offset":0,"length":200,"style":"fontsize-11pt"},{"offset":0,"length":200,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"75c4k","text":"Health Insurance","type":"header-three","depth":0,"inlineStyleRanges":[{"offset":0,"length":16,"style":"color-rgb(67,67,67)"},{"offset":0,"length":16,"style":"bgcolor-transparent"},{"offset":0,"length":16,"style":"fontsize-14pt"},{"offset":0,"length":16,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"3jm2l","text":"Due to the high security of a smart contract, they’re most suitable to handle confidential matters, such as patient files and important medical research.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":153,"style":"color-rgb(0,0,0)"},{"offset":0,"length":153,"style":"bgcolor-transparent"},{"offset":0,"length":153,"style":"fontsize-11pt"},{"offset":0,"length":153,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"asbal","text":"Not just that, but your hospital bills will be automatically shared with a few selected individuals, including your insurance company. In other words, your data is secure and is regularly updated without you having to worry about it.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":233,"style":"color-rgb(0,0,0)"},{"offset":0,"length":233,"style":"bgcolor-transparent"},{"offset":0,"length":233,"style":"fontsize-11pt"},{"offset":0,"length":233,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}

Conclusion

{"blocks":[{"key":"cdsbg","text":"What are smart contracts? In short, a smart contract is a computerized form that uses encrypted codes and blockchain technology to perform the same functions as a traditional paper contract.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":190,"style":"color-rgb(0,0,0)"},{"offset":0,"length":190,"style":"bgcolor-transparent"},{"offset":0,"length":190,"style":"fontsize-11pt"},{"offset":0,"length":190,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"9uenp","text":"Since their invention, smart contracts have steadily been used to facilitate various complicated matters, such as insurance and voting. As a result, smart contracts have minimized the chances of fraud, eliminated the need for third parties, and reduced unnecessary costs. ","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":272,"style":"color-rgb(0,0,0)"},{"offset":0,"length":272,"style":"bgcolor-transparent"},{"offset":0,"length":272,"style":"fontsize-11pt"},{"offset":0,"length":272,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}},{"key":"26mt6","text":"They may not be perfect yet, but smart contracts are a smooth alternative to what’s essentially a bureaucratic regime.","type":"unstyled","depth":0,"inlineStyleRanges":[{"offset":0,"length":118,"style":"color-rgb(0,0,0)"},{"offset":0,"length":118,"style":"bgcolor-transparent"},{"offset":0,"length":118,"style":"fontsize-11pt"},{"offset":0,"length":118,"style":"fontfamily-Arial"}],"entityRanges":[],"data":{}}],"entityMap":{}}