A smart contract is an agreement between two people or entities in the form of computer code programmed to execute automatically. The idea was proposed in the 1990s by Nick Szabo, a pioneer of modern computing, who defined them as a set of virtual promises with associated protocols to enforce them. The Bitcoin protocol, which basically records the proof of a payment, can be thought of as a primitive version of a smart contract Development .
Smart contracts run on the blockchain, which means that the terms are stored in a distributed database and cannot be changed. Transactions are also processed on the blockchain, which automates payments and counterparties. Since the appearance of the Ethereum digital currency , the creation and execution of smart contracts has been simplified, since complex transactions can be programmed in its protocol.
HOW A SMART CONTRACT WORKS
The operation of a smart contract is similar to that of other transfers on the blockchain. These are the necessary steps:
1. A user initiates a transaction from their blockchain wallet .
2. The transaction reaches the distributed database , where the identity is confirmed.
3. The transaction, which may be a transfer of funds, is approved.
4. The transaction includes the code that defines what type of transaction should be executed.
5. Transactions are added as a block within the blockchain.
6. Any change in contract status follows the same process to update.
SMART CONTRACTS PLATFORMS
Next, we review some of the most used platforms when developing and executing smart contracts on the blockchain:
Ethereum — Smart contracts are written in a programming language called Solidity and run by the Ethereum virtual machine. It is the most popular today.
Hyperledger: An open source system developed by the Linux Foundation that is not a cryptocurrency, but rather a flexible platform on which smart contracts can be built.
Counterparty: This platform incorporates data into Bitcoin transactions , that is, it uses the blockchain of this cryptocurrency and allows the development of contracts on it.
Polkadot: This is an alternative blockchain and is famous for its ability to host parachains, chains within chains, which allow more transactions than usual.
APPLICATIONS OF A SMART CONTRACT (EXAMPLES)
Smart contracts have applications in all areas where traditional contracts are currently signed:
Records
Smart contracts will make it easier to store and keep records. For example, the millions of sensitive patient medical records that must be securely stored and updated.
Trade
Most business activities depend on approval of their financing, which is a time and resource consuming process. Thanks to smart contracts this time can be drastically reduced.
Supply chains
Internet of Things devices can be used throughout the supply chain to record every step a product takes and improve its traceability. In this way, errors, theft and loss can be eliminated.
mortgages
Mortgage transactions based on smart contracts will be cheaper, faster and safer. This will allow buyers to access the property sooner and update records automatically.
Real-estate market
Smart contracts can be used to register real estate ownership more efficiently. In addition, its use can extend beyond flats, buildings or land and register all kinds of goods.
Human Resources
The use of smart contracts that record a person’s academic qualifications, certificates and experience can prevent CV fraud and thus facilitate the hiring of people, including companies, for the provision of a service.
Intellectual property
Many companies are dragged into years of court disputes over the use of patents in project development. Smart contracts can keep track of which part belongs to which company.
Health
In addition to the registration of health data mentioned above, its application in this sector can range from the traceability of medicines to the management of the cold chain, the health passport or clinical research.
Elections
Electoral fraud is a real risk in some countries and has been used as a political weapon to destabilize others. Smart contracts allow validating the identity of a voter and reliably registering her vote.
insurance
This industry spends millions each year processing claims and dealing with claims. Smart contracts will allow payment amounts to be determined automatically based on the type of policy.
BENEFITS OF A SMART CONTRACT
Smart contracts offer several advantages to the parties involved:
Independence: the participants carry out the procedures themselves, that is, the participation of intermediaries can be dispensed with.
Reliability: The contract is securely stored on a distributed network and is virtually impossible to alter or forge.
Security: being in a distributed network, the contract is duplicated in all the nodes of the network and cannot be lost.
Savings: by dispensing with intermediaries and commissions, there is a reduction in costs for all those involved.
Precision: this type of contract reduces to zero the possibility of errors occurring in the terms or in the processing.
Sustainability: the contracts eliminate the use of paper in offices, notaries and registries, and by minimizing travel, pollution is reduced.
