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5 Min. Read

What Are Smart Contracts? An Extensive Guide

The likes of blockchain technology and cryptocurrency have become more and more popular in business over the years. And in some senses, they go hand-in-hand. There have been a ton of different attempts to create a form of digital money, but the challenge of trust and privacy has always been an issue.

With a normal database, such as an SQL database, whoever is in charge can change data entries. Which adds additional risks as that person could potentially steal your money. That’s where blockchain technology started to make a difference.

Before getting too far into smart contracts, it’s important to recognize the role that blockchain technology plays. Here’s what you need to know.

Here’s What We’ll Cover:

What Is Blockchain Technology?

What Are Smart Contracts?

Key Takeaways

What Is Blockchain Technology?

Unlike an SQL database, blockchain doesn’t have a single person that’s in charge. Instead, it’s run solely by the people who use it. Plus, when it comes to the likes of Bitcoin, they can’t get hacked, faked or double-spent. And there are little or no transaction costs.

Basically, blockchain is a way for information to get recorded in a specific way that makes it almost impossible to hack, change or cheat. The technology works as a digital ledger of transactions that are then distributed across the blockchain system.

Every block on the chain records several transactions. Then, every time a new transaction happens a record gets added to each user's ledger. It’s a decentralised database that gets managed by more than one participant. This is known as Distributed Ledger Technology (DLT).

Think of it like this in terms of security:

If one block on the chain gets changed, every participant would be able to tell that it had been tampered with. So, if a hacker wanted to corrupt an entire blockchain system then they would have to manually change each and every block. And that’s every block across every distributed version of the chain.

With popular blockchain currencies like Bitcoin and Ethereum, they are always adding blocks to the chain. This adds to the security of the ledger, especially with blockchain-based smart contracts.

What Are Smart Contracts?

A smart contract gets written in code and gets inputted into the blockchain, which makes it irreversible and immutable. Essentially, it's an automated agreement between the recipient and whoever created the contract.

Ethereum, for example, has been using smart contract technology for years. Which has led to a range of decentralised applications. One of the biggest benefits to a blockchain network is that it automates tasks that used to require a third party.

For example, a smart contract uses automated transactions to approve a transfer of digital assets instead of needing a bank to sign off. All you need is an agreement between parties on the concept and contract.

How Do They Work?

Smart contracts work in a similar way compared to traditional contracts. The biggest difference is that they are digital statements between two or more parties. The contract is honoured and considered complete when certain needs get met.

Here’s a simple example. Let’s say that someone reaches out to you to purchase 10 of your products. They would lock the right amount of funds into a smart contract. Those funds would then get released immediately once the products get delivered or when the customer receives them.

One of the biggest benefits of smart contracts is that they can get programmed to work for any type of need. They can get programmed to replace governmental mandates or retail systems, for example. This can help reduce things like fees when you take part in financial transactions.

What About Security?

Since smart contracts are part of blockchain technology, there is already a high level of security. But, there can be additional security features written directly into the smart contract code. Smart contract execution on Ethereum gets written directly into their Solidity programming language.

This means that all of the relevant rules and limitations outlined in smart contracts get built right into the networks code. No one will be able to manipulate or change any of the rules or limitations. Once all participants agree on the smart contract and sign it, it’s set for life.

Key Takeaways

It doesn’t matter the type of industry that you are in, using smart contracts and blockchain technology can be helpful. Not only do they add extra layers of security for your information to be protected, but they can also help make some of your processes easier.

Simply put, a smart contract is an agreement between two or more parties. All that is needed is for the two parties to agree on the concept and contract. Once it gets signed, the contract is set for life and gets considered complete when the contract needs to be met.

So, if you had a smart contract with someone for 10 of your products, funds would get transferred immediately once they received the products. Some industries that often use smart contracts include real estate, insurance and supply chains in general.

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