Crypto Glossary

Posted on September 13, 2021 in
Glossary

Smart Contract

In the case of smart contracts, the parameters of the agreement between buyer and seller are spelled out in coded words, rather than in plain text. It is the distributed and decentralized code and agreements that make up the distributed and decentralized blockchain network as a whole that are responsible for its overall structure. Each transaction is logged, and it is not possible to reverse it.

What are smart contracts?

A smart contract is a type of agreement between two parties that functions similarly to a written contract. The information is preserved in the public domain rather than being physically recorded and documented. Instead, it is saved on top of a blockchain and is therefore immutable. The blockchain will be used to handle all transactions involving the smart contract. The blockchain may be activated immediately, without the need for third-party validation. Once a condition in the contract is satisfied, the transaction will proceed to remove any trust-related obstacles that may exist.

The fact that blockchain technology prevents retroactive change is a key characteristic of smart contracts; as a result, smart contracts are unmodifiable and final. Additionally, an automatic transaction cannot be reversed or turned back after it has been initiated. When a contract, or an activity done under the terms of the underlying contract, needs to be declared invalid, this can be a difficult task.

Consider the scenario in which you have multiple papers on your computer that contain transactions. Then there are two accountants, each of whom has an identical file on each of their computers, which they share. If a new transaction happens, an email will be sent to both accountants informing them of the specifics of the transaction. They will review the email and transaction and then react to it as a method of verifying the information. If you can finish the transaction, the accountants will do so for you and the file will be changed as a result of the completion.

How do smart contracts work?

A reasonable comparison is to think of a smart contract as a vending machine with a few additional features. If you enter a dollar into the machine, it will reward you with snacks or the item you selected. There isn’t someone standing there instructing you on how to operate the machine or ensuring that the transaction is completed successfully. However, if you put less than one dollar into the machine or click the wrong button, you will not be able to obtain the item you have chosen. Instead, both activities must be accomplished correctly for the process to be successful. In the context of smart contracts, this is how you carry out the terms of a contract.

Advantages and disadvantages of smart contracts

The Pros:

Smart contracts do not require the participation of brokers or other third parties to ratify the agreement, therefore eliminating the possibility of manipulation by third parties. The absence of a middleman in smart contracts leads to cost reductions, as previously stated. The originals of all the documents saved on the blockchain are copied several times, so that in the case of a data loss, the originals may be recovered. 

Smart contracts are encrypted, and cryptography ensures that all of the papers are protected from unauthorised access. In addition, they automate procedures through the use of computer protocols, allowing businesses to save hours on a variety of business operations. Last but not least, It has been proven that using smart contracts reduces or eliminates mistakes that arise as a consequence of manual filling out multiple forms. 

The Cons:

However, smart contracts have their disadvantages. Any flaw in the code of a smart contract may be time-consuming and expensive to repair, making it nearly difficult to change the operations that run on them. According to the idea of good faith, parties will conduct themselves fairly and will not gain from a contract in an unethical manner. Smart contracts, on the other hand, make it more difficult to verify that the conditions of the contract are satisfied in the manner that was agreed upon.

Although smart contracts aim to eliminate third-party participation, it is not feasible to completely eradicate it from the equation. Third parties take on duties that are distinct from those that they would take on in typical contracts. To give an example, attorneys will no longer be required to write individual contracts; nevertheless, they will be required by developers to comprehend the conditions to create codes for smart contracts in the future. And most importantly, since contracts contain phrases that are not always understood, smart contracts are not always capable of dealing with ambiguous terms and circumstances.

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