Academy ⟶ Blockchain

What is a smart contract and how to use it?

A smart contract is a digital protocol that ensures that a contract is automatically executed when the agreed conditions are met. Smart contracts allow you to process transactions without requiring a third party to verify or enforce the agreement. Agreements are traceable and irreversible.

7 min

Table of Contents

Introduction

The goal of smart contracts is to offer better digital security compared to traditional contracts. You can also save on costs because theoretically, you do not need a scribe. Some cryptocurrencies use smart contracts as the basis of their concept, and you can plan smart contracts on most blockchains.

What can a smart contract do?

In recent years, several new technologies have attracted a lot of media attention — for example, blockchain, artificial intelligence, clouds and no less important, smart contracts.

Probably because smart contracts have great potential. What could be safer than coded agreements that are registered on the blockchain? And if that means you can save money because expensive scribes are no longer needed.

The potential of smart contracts:

  • Confidential contracts that are executed automatically and impartially
  • Fewer intermediaries are needed to draw up contracts, execute contracts, and maintain contracts
  • Lawyers become redundant

In case all parties that have accepted the smart contract fulfill their obligations, the smart contract will know what actions should be taken. For example, you can send money to the seller as soon as the buyer has confirmed the delivery of the parcel. You can also configure a smart contract so that money is sent automatically, tracking delivery through a tracking number.

Simple explanation

Smart contract

As an example, it is customary to explain the case of a bookmaker. Suppose we want to bet the amount of money X that Chelsea will win the football league. To do this, we must create a neutral account controlled by a smart contract, to which each side must deposit X amount in cryptocurrency. At the end of the season, if Chelsea was the winner, the contract itself would gain access to the official database, check the winner of the football league, and automatically send funds to the winner of the bet.

Systems such as PayPal currently use a so-called escrow agreement, whereby an intermediary known as an escrow agent checks compliance with certain conditions agreed upon in the contract to activate, where appropriate, protocols that allow this transaction. Despite the flexibility of Paypal, the potential of this technology will enable us to do everything without the intermediary.

Advantages and disadvantages

The benefits are apparent and can be summarized in three words:

  • Autonomy
  • Security
  • Trust

When using smart contracts, it is no longer necessary to resort to the help of a third party.

For example, a lawyer or notary public, which, in addition to being prone to errors, entails high costs. The blockchain can protect the information in an encrypted network that can be accessed from anywhere in the world, so speed and security are undeniable.

On the other hand, these types of programs also have certain shortcomings or, rather, obstacles that must be overcome - the first consists of the technologies that it uses: IoT and blockchain. Although IoT can provide a real connection with physical assets, the truth is that it still has a long way to go. IoT devices are easy to crack. In the meantime, the blockchain is more than safe, but it is unchanged. Once the conditions are agreed upon, they cannot be changed later, which, of course, is disadvantageous for the contract.

Example: A multi-million contract for the supply of raw materials from one country to another is concluded. But then, in the exporting country, unforeseen circumstances occur, as a result out of 100 containers, 99 arrived. Until the 100th is delivered, the system will not be able to pay.

Solution: Solutions are also being developed for this, e.g. Accenture creates an editable blockchain.

There are also not so many smart contract programming experts in mass adoption, and it’s worth mentioning that sometimes they are wrong. These programs are delicate, and if there is only one mistake (error) in your programming, a third party with bad intentions may steal the funds stored in the contract. This already happened to the DAO last year, but since this is a new technology, such incidents may happen in the beginning.

How to make a smart contract?

We have already noted that smart contracts are not written in natural language, but in computer code, so the big question is: do we need to know how to program to create a smart contract? Well, now that this technology is taking its first steps, it is preferable, but not required.

In the Introduction to smart contracts, two “layers” for smart contracts described:

  • A platform for smart contracts (SCP), which is an infrastructure that allows you to create and work on blockchain
  • A smart contract management system (SCMS), a protocol, will be added to this infrastructure to make it easier for the user to manage these contracts without programming knowledge. In other words, a convenient graphical interface.
  • Guarda Token Generator is an easy-to-use and intuitive interface for creating your own ERC-20 token in just a few simple steps. Guarda will take care of everything you might worry about, and our guides will help you with this. Guarda allows you to create your smart contract through our own generator token. We support a large number of coins (more than 50 at the moment and this amount is expanding rapidly), as well as all ERC-20 and ERC-721 tokens. Our wallets are available in many different formats, including web versions, desktop versions, mobile devices (Android and iOS), and Chrome extension versions. We value your privacy, therefore, we never store the personal information of our users.

How can smart contracts be used?

Currently, most examples of smart contracts are related to financial services. Still, with a little imagination, you can use them much more often — for example, stocks, crowdfunding, voting, betting, or auctions.

In the twenty-first century, there is the possibility of transferring all sorts of paper contracts into digital smart contracts, and consequently, a wide range of potential applications emerges.

  • Payment Automation: A contract can be programmed to ensure that the required amount arrives at a specified time to specified persons or organizations.
  • Registration and change of ownership: the necessary documents can be registered on the blockchain to establish ownership and change the owner through intellectual contracts.
  • Energy transactions: to create a digital ecosystem for the energy exchange. Thus, the sources of electricity or fuel will be associated with smart contracts concluded only between individuals or with involved organizations, which, in turn, can personalize the consumption of each customer.
  • Intellectual property: You can embed a smart contract in any object that is controlled by digital means. It is here that “smart property” is born, which can be assimilated with IoT objects connected to the network. Thus, for example, the rental of these properties can be automated. Also, cryptocurrencies such as Bitcoin can be considered as a set of smart contracts that enforce property law. Cryptographic methods are used to ensure that only the owner of the digital token can spend it.
  • Financial services: Cryptocurrencies open up a wide range of different uses for smart contracts that otherwise would not be possible.

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