Understanding Smart Contracts
Smart contracts, sometimes called self-executing contracts, blockchain contracts, or digital contracts, help you exchange money, properties, and valuable assets in a way that is free of conflict or trust issues while avoiding the use of a third party or middle man. It can be understood using legal settings. Say you want to sell any valuable property to a client, and you don’t want to get ripped off your property; you don’t want to lose it to fraudulent buyers. You would employ the service of a lawyer to stand as a middle man (in the cryptocurrency world, known as escrow) to foster a fraudulent-free transaction between you and the buyer. But, the smart contract is self-executing, not needing escrow or a third party.
The smart contracts run on defined rules, in which there are penalties around the agreement. Besides this, it automatically enforces obligations made on the contract. Smart contracts, in simpler term, is a program that runs on certain conditions, if the contingencies are not met, the contract won’t be executed. It is a great idea, as it takes away the fear of transacting with another party. It works solely on the principle of requirements or conditions met. For example, if I agree to buy a car for a particular worth of Bitcoin, I’d have to pay the amount on time stipulated; when the contract confirms my payment, only then will the blockchain release the documents that will get me exclusive right of ownership to the car.
The good thing is you can use smart contracts for all sorts of situations ranging from insurance premiums to crowd-funding agreements.
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Advantages of Smart contracts
Autonomy: There’s absolutely no need for employing the service of intermediaries like brokers or lawyers. Execution of the contract is managed automatically by the network.
Trust: Smart contracts is an entirely trustworthy system as claims of document being lost by other parties is removed. Your records are encrypted on a shared ledger. There’s no way your documents can be tampered with before and during the contract.
Speed: Smart contracts will save you a lot of time; if you would be doing this manually, you’d spend a chunk of time and paperwork. Smart contracts use software code to automate tasks, thereby saving you from tedious tasks.
Safety: Smart contracts keep your document safe with Cryptography. It’d take crazily smart hackers to hack the code.
Lower cost: Smart contracts will save you the cost of employing the service of an intermediary since it is self-executing, not needing third-party intervention.
Accuracy: You’d probably make many errors when filling out forms manually, but smart contracts are automated and so are more accurate than humans.
Disadvantages of Smart contracts
Exposure to bugs: It is programmed software and so is not always bug-free.
Immutability: If there is any flaw or error in code, it cannot be removed once deployed. Even when they can be removed, the process is costly and resource-intensive.
Smart contracts are a great way to go when looking for trustworthy and fraudulent-free transactions with other parties. However, they have their limitations, and so you are advised not to depend on it heavily.