Smart contract is a transaction protocol based on blockchain technology. This tool brings many benefits to all parties involved in the contract.
Similar to traditional contracts, smart contracts include all agreed-upon conditions. However, the terms of a smart contract are written in a programming language based on blockchain technology.
In the following content, let’s explore what smart contracts are, and how the applications of smart contracts bring benefits with Tonraffles.
Table of Contents
What is a smart contract ?
A smart contract is simply a program stored on a blockchain that runs when predetermined conditions are met.They are often used to automate agreement execution. As a result, all parties involved in the contract can be certain of the outcome immediately without the need for any intermediaries.
Smart contracts also have the ability to automate workflows, triggering the next action when certain conditions are met.
How do smart contracts work ?
Smart contracts operate by following simple “if/when…then…” command rules, written as code on the blockchain.
A network of computers executes actions when predefined conditions are met and verified. These actions include disbursing funds to appropriate parties, registering assets, sending notifications, or issuing tickets, among others.
Subsequently, the blockchain smart contract updates upon completion of the transaction. This means the transaction is immutable, and only authorized parties have the right to view the outcome.
In a smart contract, numerous necessary provisions can be set to satisfy participants and ensure tasks are fairly completed.
To establish terms, participants must specify how their transactions and data will be represented on the blockchain, agree on the “if/when…then…” rules governing those transactions, list all possible exceptions that may occur, and define a framework for dispute resolution.
Then, the smart contract is programmed by developers. Nowadays, the structure of smart contracts is somewhat simplified by many blockchain service providers for businesses, offering templates, web interfaces, and various online tools.
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Benefits of smart contracts
Smart contracts are becoming increasingly popular due to their many benefits:
Speed, Efficiency, and Accuracy
When a condition is fully met, the contract is executed immediately. Smart contracts are digital and entirely automated, so participants don’t need to deal with paperwork procedures, saving time and avoiding errors (often caused by manual document drafting).
Trust and Transparency
With no third party involved and transaction records encrypted and shared among participants, information cannot be altered for personal gain.
Security
Transaction records on the blockchain are encrypted, making them highly resistant to hacking. Furthermore, because each record is linked to previous and subsequent records on the distributed ledger, hackers would have to change the entire chain to alter a single record.
Cost Savings
Smart contracts eliminate the need for third parties to process transactions. As a result, participants save on associated costs and reduce time wastage.
Applications of smart contracts in practice
Some ways businesses benefit from smart contracts today:
Smart Contracts in the Financial Industry
Decentralized Finance (DeFi DApp) applications represent an efficient alternative solution for traditional financial services. These applications are becoming increasingly popular due to their reliable, immutable, transparent nature based on blockchain technology and smart contracts.
DeFi DApps provide parallel services to the financial industry, such as lending, savings, trading, and a range of other financial services.
The decentralized business model can bring significant benefits and convenience to both financial organizations and users. With high transparency, 24/7 functionality, and lower costs due to smart contract usage, DApps can lower barriers to entry into the financial services sector for global citizens.
DeFi projects have already amassed billions of US dollars in value. This trend is expected to continue as more people become familiar with the unique value propositions of this field.
Users can participate in this new generation of financial services without the need for centralized guardianship or intermediary fees. Although the DeFi sector is only a few years old, the impact of DApps and smart contracts on the financial industry has been clearly felt.
NFTs and Smart Contracts: Blockchain Technology in Gaming
The global gaming industry is a hundreds-of-billions-of-dollars ecosystem. The gaming industry continues to grow rapidly, but the way value is created and distributed throughout the industry may be unfair.
Developers create and release games, while players pay to participate and interact with those games. This maintains a one-way value flow, where players spend money to unlock access to assets in the game and configure the game.
In contrast, blockchain technology applied to gaming allows players to capture the benefits and value of in-game purchases, as well as buy back assets more efficiently.
Blockchain technology in gaming is often driven by Non-Fungible Tokens (NFTs) – unique digital assets representing content in games.
NFTs are developed based on smart contracts. These tokens are unique, rare, and indivisible, facilitating player ownership. Smart contract-based games have the potential to promote widespread adoption and create a fairer value model.
Through the implementation of blockchain technology in gaming, players will store in-game purchase transactions, sell them to others, or transfer them to supported related games.
Because NFTs are unique and can be designed to retain value outside of the games they originate from, blockchain-based NFT games and DApps have the potential to expand the gaming economy, promote the development of new games. Some notable blockchain platforms with significant gaming developments include Ethereum, TRON, EOSIO, and NEO.
Smart Contracts and Blockchain in Legal Industry
One of the most promising use cases for smart contracts in the real world is the potential to function as legally binding contracts. These are the type of contracts that provide information for most modern business commitments.
Technology has driven innovation in the legal industry, most recently with the advent of electronic signatures. Smart contracts represent another new development in this space and have the potential to soon become the choice for parties to legal agreements, helping reduce costs associated with hiring lawyers and intermediaries.
Widespread use of individual smart contracts for countless types of transactions can reduce costs and speed up execution. To date, several U.S. states have begun allowing the use of smart contracts and blockchain in the legal industry in certain contexts.
For example, Arizona allows for the creation of enforceable legal agreements through smart contracts, and California allows for marriage licenses to be issued through blockchain technology.
Blockchain in Real Estate
Through tokenization, smart contracts are driving partial ownership of assets. Therefore, it reduces the barrier to entry for many people, streamlines documentation, and transaction processes by integrating blockchain and real estate transactions.
Especially, there have been successful efforts in tokenizing real estate through platforms like RealT and SolidBlock.
Anyone who has bought a house or other real estate knows about the hidden costs associated with closing fees, transfer of ownership, and brokerage fees. These costs are reduced or even eliminated by leveraging smart contracts.
When a portion of property is tokenized, most of the necessary record-keeping can take place through related smart contracts, saving time and money for all parties involved.
Using Smart Contracts in Business Structuring: Building DAOs
In 2017, the state of Delaware (USA) passed Senate Bill 69, allowing businesses to incorporate and manage via blockchain technology.
This law opened the door to the development of Decentralized Autonomous Organizations (DAOs) operating as corporations. Ownership and compensation can be built into smart contracts.
DAOs use smart contracts to encode corporate structures. As a result, DAOs save a lot of administrative costs including office space, hiring, and salaries.
Applications of Smart Contracts in Emerging Technologies
One of the most interesting applications of blockchain technology and smart contracts is the ability to facilitate complex computational tasks related to Machine Learning (ML) and Artificial Intelligence (AI).
By combining AI’s deep data processing with blockchain’s decentralized security and immutability, in the future, AI has the potential to autonomously create smart contracts.
As smart contract applications are deployed across various industries, they will become increasingly complex to suit each sector. AI can enable the construction of more complex and adaptive smart contracts and enterprise-grade DApps, which are more responsive and feature-rich.
Smart contracts can benefit from the advanced computing capabilities and adaptive systems of AI technology. While deploying AI using smart contracts to automate rule-based processes, it also provides a secure environment for sensitive, valuable machine learning data.
These are just a few prominent examples of the applications of smart contracts. In addition to the fields mentioned above, smart contracts bring benefits to the healthcare industry, address issues of the Internet of Things (IoT),…
