What are smart contracts on the blockchain? 4 real-world use cases

Smart contracts are revolutionizing the way transactions are conducted. These self-executing agreements automatically enforce their terms based on pre-established rules, eliminating the need for intermediaries in a wide range of processes. This automation enhances efficiency, reduces costs, and increases trust by ensuring that transactions are executed exactly as agreed.

Before smart contracts emerged, creating complex cryptocurrency protocols that allowed multiple parties to transact in a trustless manner was nearly impossible. Traditional applications like Uber or Airbnb relied on central authorities to enforce obligations between customers and vendors.

Smart contracts, powered by blockchain technology, offer a more secure, efficient, and transparent method for executing agreements. By automating transactions based on predefined rules encoded in their programming, smart contracts enable trustless systems where parties can engage in transactions directly between each other, without needing to pass through a central authority.

This article will explore the history of smart contracts, how they work, their key benefits and limitations, and how they are driving change across various industries.

Smart contracts are self-executing programs stored on the blockchain that execute transactions based on pre-set conditions. Unlike conventional contracts that depend on legal language and intermediaries, smart contracts use code to execute actions automatically when specific criteria are met.

Think of smart contracts like digital vending machines: input the correct payment and the machine delivers the agreed product, service or asset. This automated process boosts efficiency and removes the need for intermediaries.

Residing on decentralized blockchains, smart contracts facilitate transactions in a transparent manner. Their immutable nature ensures they remain unchangeable once deployed, offering security and reliability across various applications.

The concept of smart contracts was introduced in 1994 by Nick Szabo, an American computer scientist and lawyer who also developed the idea of "Bit Gold" in 1998. 

Szabo's idea was to create computerized protocols capable of automatically executing contractual terms, drawing inspiration from electronic transaction methods like point-of-sale (POS) systems.

In his 1996 paper, Szabo defined a smart contract as, "a set of promises, specified in digital form, including the protocols within which the parties perform on the other promises." He predicted that securities and derivatives could be combined into complex financial instruments, standardized and efficiently traded through computerized analysis.

Many of Szabo's predictions materialized before blockchain technology even existed. Today, derivatives trading largely relies on computer networks, using sophisticated term structures — just as Szabo anticipated.

Although some speculate that Szabo might be the anonymous creator of Bitcoin, Satoshi Nakamoto, he has consistently denied these claims. His early work, however, laid the foundation for the smart contracts that are now integral to blockchain technology, shaping the future of finance and technology.

Smart contracts are self-executing programs stored on the blockchain. Smart contracts are only executed once their predetermined conditions are met. They follow simple "if-then" logic coded into the blockchain protocol.

When deployed, a smart contract is distributed across the blockchain network, awaiting specific trigger events like a payment or a set date. When the specified conditions are fulfilled and confirmed, the contract automatically carries out its programmed actions.

The decentralized structure of blockchain guarantees that execution of the terms defined in the smart contract is transparent, verifiable and tamper-resistant. Each node in the network evaluates the contract and agrees on the result, removing the necessity for intermediaries and minimizing the chance of manipulation.

While Ethereum remains one of the most popular platforms for smart contract development, other blockchains like Tezos, Solana, Polkadot and Cardano also support them. The contract code is publicly verifiable, allowing anyone to review the logic.

Smart contracts are written in programming languages such as Solidity, Plutus and Michelson.

By automating and securing the execution of agreements, smart contracts may potentially enhance efficiency across diverse sectors, including finance and supply chain management. These intelligent pieces of software represent a notable advancement in digital transactions and agreements.

For a deeper understand of possibilities that smart contracts unlock, check out our article What can you do with blockchain technology?

Smart contracts, powered by blockchain technology, represent a significant advancement in how agreements and transactions are handled. They offer a range of advantages that streamline processes, enhance security and build trust. However, they also come with certain limitations that can impact their effectiveness.

Here are four of the most crucial benefits of smart contracts:

• Automation and efficiency: Smart contracts automatically execute and enforce terms without the need for manual intervention, leading to faster and more efficient processes.
• Cost savings: By removing intermediaries and reducing administrative tasks, smart contracts can cut down on transaction costs and fees.
• Transparency and trust: The immutable and transparent nature of blockchains ensures that all contract terms and transactions are visible and cannot be altered, thereby fostering trust among parties.
• Security: Blockchain technology’s decentralized and cryptographic features protect against unauthorized changes and fraud.

Despite their benefits, smart contracts also face several limitations:

• Subjectivity: The functionality of smart contracts is limited by what is written into their code. If a contract requires subjective judgment or flexibility, it becomes challenging to incorporate these aspects into the design.
• High effort to change: If bugs or loopholes are present in the code, modifying a smart contract can be labor-intensive. It often requires significant work from the community and consensus from the network’s nodes.

• Incorporating real-world data: Many smart contracts need real-world data (such as currency values, stock prices or shipping locations) to execute properly. While oracles like Chainlink and Band Protocol help by providing off-chain data to the blockchain, integrating this information can be complex.

Developers are only beginning to tap into the potential of smart contracts, which are poised to revolutionize more industries than blockchain alone. As technology advances and adoption widens, the possibilities for smart contracts are expanding rapidly, creating opportunities in sectors that traditionally rely on intermediaries and manual oversight.

The future of smart contracts goes beyond replacing traditional contracts; it’s about reshaping entire industries by eliminating bottlenecks, reducing costs and creating a more transparent, secure and efficient digital economy.

Here are some notable examples of how smart contracts are being used across different parts of the global economy.

Smart contracts can streamline the mortgage process by automating the verification of applicant information, payment schedules and loan disbursements. This reduces the reliance we have for intermediaries like banks or lawyers. It also helps to ensure that all parties involved meet their obligations transparently and efficiently. For example, a smart contract could automatically release funds to a seller when certain milestones, such as home inspections and credit checks, are verified as completed.

Managing digital identities can be made more secure and private through blockchain-based smart contracts. Individuals can have greater control over their personal data, choosing to share only the necessary information with third parties. Estonia, for instance, has implemented a blockchain-based digital identity system that aims to allow citizens to authenticate their identity, sign documents and access services securely without intermediaries.

Smart contracts can enhance transparency and traceability in supply chains by tracking the movement of goods from production to delivery. Each step of the process is recorded on the blockchain, ensuring that tampering or fraud is minimized.

Smart contracts can improve the efficiency and integrity of clinical trials by automating the process of patient enrollment, data collection and consent management. They ensure that trial protocols are followed strictly and that data is securely stored on the blockchain. For example, smart contracts can automate the release of funding to research teams when specific milestones, such as participant recruitment or data submission, are achieved. This reduces the risk of human error and enhances transparency in the trial process.

Understanding smart contracts highlights blockchain technology's transformative potential and growing significance for investors. You can tap into new investment opportunities and enhance transaction efficiency by leveraging smart contracts.

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