What is a smart contract?
6 min read

What is a smart contract?


Summary:

What is a smart contract? Smart contracts are self-executing agreements written in high-level programming languages. The Ethereum network is suitable for these immutable contracts, which have a wide range of use cases.

Saddle will give you useful information about smart contracts, and provide you with practical examples to better understand this system used by developers to build decentralized applications and any sort or contract.

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What is a smart contract and how does it work?

Smart contracts can be defined as self-executing agreements written using high-level programming languages. These contracts work on predetermined conditions that need to be fulfilled for the contract to be executed successfully.

The first who used this term was Nick Szabo in 1994. Sazbo, the creator of Bit Gold, defined smart contracts as useful tools to: avoid fraud, reduce costs and avoid intermediaries.

One of the most important features of smart contracts is that they don't need intermediaries to function or to be binding. With this, there is no possibility of censorship or any other kind of interference.

Nodes can get smart contracts to be executed. Those nodes need to reach a quorum. Smart contracts transactions are submitted to a node, and the node broadcasts the contract to the network. If the contract can be executed, the blockchain is updated and visible to the whole network. If the transaction is not valid, the state of the blockchain is not altered.

Think of smart contracts as "if-then" announcements from two or more parties. If parties have met the requirements, the agreement may be fulfilled or it can become finalized in full. Let's say a company asked some farmers for 100 ears of corn. They can lock money in a smart contract. If farmers fulfill their obligations, money is unlocked and farmers paid automatically. This is just an example, but there is a wide range of use cases we'll cover in detail later.

Smart contracts are not always considered legally binding.

There are some states that have taken the necessary steps to make them valid, but the real implementation of smart contracts regards peer-to-peer agreements.

That’s why they’re fully functional when it comes to decentralization – and make it possible.

Countries like Belarus and states like: Arizona, Ohio, Wyoming, Vermont, Nevada, and Tennessee consider smart contracts legally enforceable.

In April 2021, the UK Jurisdiction Taskforce (UKJT) published the Digital Dispute Resolution Policy (the Digital DR Policies) to enable the fast resolution of blockchain as well as crypto lawful conflicts in Britain.

Why are smart contracts important? Smart contracts benefits

Smart contracts are important for several reasons:

  • They are flexible as they give developers the freedom to build applications and tokens which incorporate everything from financial instruments to logistics and games
  • They can include several transactions which allows quicker, more complex strategies
  • Once a smart contract is added to a blockchain- applications, transactions, and tokens built on it can't be reversed
  • No intermediaries are needed

We're still in the very early days of smart contracts. However, there are firms as well as governments that experiment with their potential use cases. They are currently utilized for a big range of tasks, including, but not limited to: digital identifications, supply chain monitoring, insurance policy, and data storage.

Some useful smart contract use cases

Smart contracts can have countless use cases, but we’ll cover some of the most relevant ones.

Financial Services & Insurance

Financial services and trading strategies can be implemented with smart contracts.
From the collection of data to the full implementation of transactions and applications, any financial instrument can be built on smart contracts.

This can be extremely useful for privates and businesses that want to: use automation, reduce prices, and accelerate their activities.

Insurance policy is another use case of smart contracts. Because of the ability to collect data, if the smart contract is set up with the ideal policy, it can execute quickly after an accident. This allows for quicker transactions, and dramatically reduces the risk of fraudulent activity.

Supply chain management

Supply chains can use smart contracts in several ways.

The management of supply chains can be fully automated and due to this, the smart contract can: collect data, record entries, release payments, improve traceability,  and find weaknesses. In short, smart contracts improve efficiency.

Automated payments

There is no question that smart contracts can help in global goods transfer and payments.

Smart contracts can work in cross-border payments and foreign exchange. Companies that use this service would reduce costs and avoid possible conflicts and frauds.

Another use case related to payments is through escrow. Using this method in the requires that money is stored when a new contract starts and released if parties respect the terms of the agreement. Smart contracts can automate this process in its entirety-leading to a more efficient process.

Mortgage transactions

These self-executing contracts can be effectively used in the mortgage transactions as well. Smart contracts enable mortgages to be automated and relieves both the owner and the buyer. It is imperative that smart contracts have to be coded according to the specific home loan arrangement to ensure accuracy.

To give an example, smart contracts can be set up to manage mortgage payments as the contracts will be able to track said payments.

Engagement contracts

In general, smart contracts can be used for any kind of engagement contracts –  contracts that state that two or more parties want to engage in a specific activity.

Real estate

Blockchain technology and smart contracts allow a non-liquid market to become liquid, especially due to experimentations related to the tokenization of assets. Property owners can easily benefit from higher liquidity obtained by trading fungible and non-fungible tokens linked to their assets.

Employment contracts

The role of smart contracts in today’s world is being considered to improve trust among recruiters and workers. In the surge of the gig economy and freelance work increasing significantly, smart contracts should be considered as a plausible solution to manage short and long-term contracts.

Creating smart contracts

You can use smart contracts to create other smart contracts. The level of automation and complexity you can reach allows you to build basically everything with smart contracts.

Supply chain transparency

We’ve already mentioned how smart contracts can be useful for the management of supply chains, but another aspect to take into account is transparency.

Data is always available and can be checked by parties. As stated, the smart contract doesn’t execute if inputs are considered invalid. This is a useful way to avoid any kind of fraudulent activity.

Medical research

The capability of smart contracts makes it easier to improve medical research and find new solutions while protecting people’s privacy.

Smart contracts can also be used to automate trials as well as being used to share data across the industry. They can assist in the identification and permission processes, as well as in the verification of information.

Challenges

The most relevant challenge to smart contracts is public legal validity of these agreements. Since all states and territories don't consider them as legally binding, it may be hard for smart contracts to be fully implemented, especially for what concerns cross-border transactions.

Belarus was among the first countries to consider them valid, and this validity has its roots into the traditional legal system. Denis Aleinikov, the lawyer who worked at the Decree “On Development of Digital Economy” stated, "smart contracts represent a new way to bind parties to specific terms and conditions, so they don’t do anything different from traditional contracts."

However, this kind of approach needs some consideration.

To create legally binding smart contracts, developers may not know all the clauses that can make a contract stronger, In addition,  lawyers might not know anything about coding.

This means that mass adoption of smart contracts, especially for business reasons, might require totally new jobs and attitudes towards this innovative industry.

Moreover, smart contracts are made up of codes – and mistakes are possible.

Future of smart contracts

The smart contract model today is an example of the “Amara law”, which states that people tend to overestimate new technology in the short term and underestimate it in the long term.

Although smart contracts will have to evolve before their use in complex commercial relations is widespread, it has the potential of revolutionizing the rewards structures that shape future structures. It's important to focus on how a concept or structure can be transferred to these new technologies.

Today, a lot of blockchains have smart contract functions, developed by communities of programmers creating dApps utilizing smart contracts on blockchains such as Universe, NEO as well as Hyperledger. The scope of smart contract capacities can range from very straightforward on something like Bitcoin or Litecoin, to more dApp-capable blockchains like Ethereum, Polkadot, and Arbitrum.

Saddle bases its platform on smart contracts too, addressing one of the main challenges related to smart contracts – security. Saddle conducts internal audits and uses external agencies to further check its codes.

If you want to know more about our work, check out the Saddle dApp and enjoy our low slippage platform.

Learn more about Saddle.

Use the dApp.

Join the community and earn SDL.