Smart contracts are programs running on blockchain and which execute when certain criteria are met. In most cases, they’re employed to automate the implementation of an agreement so that all parties can be certain of its outcome without bringing in a third party or losing time. A workflow can be automated such that the next activity is executed automatically when certain circumstances are satisfied.
Since they are based on blockchain technology, smart contracts eliminate the need for third parties in the execution of processes or agreements. This is what has made them increasingly attractive to many businesses because of the resultant low cost and privacy.
How do smart contracts work?
Smart contracts are distributed ledger programs that are impenetrable by outside parties. Their completion is usually subject to the fulfillment of specific, well-defined conditions. Such conditions can be linked to the completion of several other operations linked in a logical flow network. In some instances, multiple smart contracts come together to help in the implementation of the overall contract.
Ethereum is currently the leading platform for smart contracts. However, in recent months, there has been the emergence of competitors such as Solana, Binance Smart Chain, Cardano, and Polkadot.
The contracts’ structure is in a manner that outlines the logical steps that must be fulfilled for successful execution. Some of the things that may be specified include the parties that qualify to transact, the conditions that they must meet, and time of execution, etc.
For instance, a company may agree with its suppliers on the number of goods to be supplied, the timeline for the supply, quality control parameters, and the payment process flow. It can also define the dispute resolution process for the entities involved.
However, smart contracts that integrate dApps allow accessibility by parties that may not necessarily be a party to the contract. They are, by design, open-source, and any interested party can access them, evaluate them and decide whether they would be willing to use them.
Benefits and limitations of smart contracts
Savings and self-reliance: The use of smart contracts eliminates the need for brokers or other third parties to ratify the agreement, making them impermeable to third-party manipulation. They also help their users to save money since there is no middleman.
They are secure: When the contract is run on the decentralized blockchain infrastructure, it eliminates the possibility of an attacker exploiting a single point of failure. It also prevents integrity issues such as bribing a centralized middleman or tampering with the outcome.
They are reliable: When the contract logic is executed twice and validated by a network of nodes to ensure reliability, there is little chance of the contract’s terms being violated. This enhances reliability and trust that the contract will be executed as intended by all parties.
They promote equitability in contract execution: Rent-seeking and value siphoning are made more difficult for a for-profit middleman when the rules of the agreement are hosted and enforced on a decentralized network.
High efficiency: By automating the backend activities of an arrangement (such as an escrow), both parties save time. In addition, the counterparty fulfills their commitments without having to rely on a middleman for the transaction.
Easily adaptable: Because they operate on blockchain technology, they are quite flexible. They have the ability to store data in many different forms, and they can be designed or customized to fit specific needs.
Transactions safety: Smart contracts enhance the quality of processes and provide a safe environment for executing transactions, with a negligible chance of third-party interference.
Management bottlenecks: It’s not always easy to oversee the implementation of smart contracts. By design, they are set up in a manner that makes it almost impossible to alter or modify to suit changing needs. This may be detrimental in case justifiable circumstances arise thereafter. Ultimately the parties may have to come up with a new contract.
Tunnel view: Because they are to a great extent inflexible, they can lead to paralysis of processes when all or some of the parties involved are uncomfortable with parts of the contract midway through the implementation period. If things turn for the worse, this can lead to costly losses to the parties involved.
Isolation: Because they function on segregated blockchains, there is no built-in connection between them and the outside world. This is one of the intrinsic constraints of technology.
They are typically delinked from all other systems in the outside world. This has led to criticism that they are out of touch with the dynamics of real-world processes. Their detachment from other systems is comparable to a computer with no internet connectivity, which can bring adaptability issues.
There are many uses for smart contracts, and their potential goes far beyond simply transferring ownership of things. By automating and simplifying ordinary and repetitive activities for which individuals presently pay banks and lawyers large fees, smart contracts nullify the need to incur high legal and transaction fees.