In 1994, a cryptographer named Nick Szabo realized that a decentralized ledger could be used for a self-executing contract, also known as smart contracts, to be converted to computer code, stored, and replicated on the system. What exactly are smart contracts, how do they work, and how can they be used? Let's answer three common questions about smart contracts.
1. What are Smart Contracts?
Smart contracts help you exchange money, property, shares, or any other valuables in a transparent way--all while avoiding the services and charges associated with it. One analogy is to compare smart contracts to vending machines. With smart contracts, you can drop a bitcoin or other cryptocurrency into the vending machine (or ledger) and whatever it is you paid for drops into your account.
Further, smart contracts define the rules and penalties of an agreement like a traditional contract but they also automate the execution of the contract. Because smart contracts are converted into computer codes, once the agreement is reached, it can't be changed, which better allows for the automated aspect of the contract.
Similar to vending machines, smart contracts automate the transaction process.
2. How do Smart Contracts work?
Continuing the vending machine analogy, smart contracts work much the same way:
Let's say Greg wants to buy Steve's house and they form an agreement on a blockchain using a smart contract. The smart contract contains and therefore constitutes an agreement between the two. In simple terms, the agreement will say something like "WHEN Greg pays Steve 300 Ether (a cryptocurrency), THEN Greg will receive ownership of the house."
When Greg makes the necessary payment, the house automatically "drops" from Steve's account and into Greg's. As noted above, once the contract has been put into place, it cannot be changed, meaning that Greg can feel safe to pay Steve the cryptocurrency for the home.
In this scenario, Greg and Steve both get to avoid the fees of third-party companies including banks, lawyers, and a broker.
3. How can I use a Smart Contract? / What are common uses for Smart Contracts?
Smart contracts have a wide variety of applications--so they can be used in almost any industry. Some of them are somewhat theoretical, but it does let the imagination run wild.
In government, smart contracts could be used as a very secure voting system. In business management, smart contracts can eliminate breakdowns in communication and workflow because of the accuracy, transparency, and automation of the system. For supply chains, smart contracts help maintain inventory and decrease the chances of loss and fraud. It is even possible that smart contracts could be used to determine who was at fault for an automobile accident. Smart contracts enjoy literally limitless potential!
Smart contracts allow for greater autonomy, trust, safety, speed, savings, and accuracy all while providing a built-in backup system for your legal agreements. They eliminate all confusion and chances for human-error, so if smart contracts are what your business needs, put the SIMBA Chain team to work for you.