The blockchain is ideal for storing smart contracts due to the security and immutability of the technology. The data in the Smart Contracts is encrypted, which makes it impossible to lose the information. In this article we explain what Smart Contracts are, what they are for and their advantages and disadvantages. Keep reading and don’t miss it!

What are Smart Contracts?

After the launch of bitcoin there have been many interesting projects that have been coming out. Many of them with the aim of contributing new ideas and decentralized solutions to the centralized processes or applications that we use the most today.

These types of mechanisms are known by the name of Smart Contracts. Its use supposes the elimination of intermediaries in order to simplify processes and, consequently, save costs for the consumer. It is, as its name suggests, an intelligent contract. It is also known as a “crypto contract”.

This is usually a computer program that directly controls the transfer of digital currencies or assets between two parties. Smart Contracts not only define the rules related to an agreement in the same way as a traditional contract, but can automatically fulfill those obligations. They do this by executing the actions required by those clauses. For example, determining if an asset should go to a person or should be returned to whoever originated it.

Smart Contracts are stored on blockchain technology.

What are Smart Contracts for?

Smart Contracts are complex and their possibilities go beyond the transfer of assets. They can also carry out actions such as executing transactions in a wide range of fields. From legal processes to insurance premiums, crowdfunding agreements and financial derivatives.

Smart Contracts or intelligent contracts have the power to disintermediate the legal and financial fields. Specifically, by simplifying and automating the routine and repetitive processes for which companies currently pay considerable fees to lawyers and banks.

How does a Smart Contract Work?

As the security of transactions is guaranteed through blockchain technology, smart contracts can operate automatically, this means that verification by a supervisory entity is not necessary. It will suffice to indicate in a computer program what is the result that has to be executed after a certain event occurs, that is to say: if X occurs then Y.

It is essential that each of the parties involved in the contract know and accept in advance the rules and steps that are going to be executed, since once the execution of the smart contract has begun, the programmed rules cannot be altered. Each step or clause formed is registered in the blockchain and cannot be modified.

How to Use a Smart Contract?

So far, we have talked about smart contracts as a technology that works within the blockchain universe, but it can also work in traditional economic ecosystems, outside the blockchain network. External interaction can be provided by the different parties involved in the smart contract, including a figure called an oracle. These are external sources of information agreed by the participants who update the necessary information in the blockchain to be able to verify compliance with the agreements and thus execute the corresponding steps. 

Commercial transactions are an example of how a smart contract can help transform the traditional economy. Let’s imagine that on one side we have a company that sells frozen foods and on the other, a supermarket chain that buys them. They are in different countries and it is the first time that they are going to do business together, so they resort to a smart contract that facilitates the transaction and guarantees that each of the parties complies with the agreement. 

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In fact, the role of lawyers could also change in the future as smart contracts gain traction in areas ranging from traditional legal contract awarding to producing customizable smart contract templates. In addition, these mechanisms not only have the ability to automate processes, but also to control audits and perform risk assessments in real time.

Smart Contracts: Advantages and Disadvantages

Blockchain- based smart contracts are helping make business and other transactions more secure, efficient, and profitable.

A wide variety of industries could benefit from using Blockchain- based smart contracts as part of their supply chain. The automation of payment processes through Smart Contracts can, among other things, reduce overbilling and prevent fraud.

For example, the music industry could register ownership of its songs on the blockchain, and then implement a smart contract to ensure that it gets paid when the music is used for commercial purposes. On the other hand, this mechanism could also benefit the automobile industry by storing available information on vehicle maintenance and accident and ownership history.

Advantages and Disadvantages

Among the advantages and disadvantages of the use of Smart Contracts we find the following aspects:

  • Cost reduction: These mechanisms eliminate many operating expenses and save resources. Among them, the personnel necessary to monitor a process.
  • Greater speed of processes : Smart Contracts are executed in automated processes. In most cases, as we have discussed above, they can eliminate human involvement. This directly increases the speed of business transactions stipulated in the contract.
  • Autonomy : Taking into account the previous point, in the case of smart contracts, the network performs them automatically. This supposes eliminating the need and the associated risk of a third party being involved in the implementation of these mechanisms.
  • Reliability and Accuracy : Once the relevant data is entered into the blockchain, it cannot be changed or deleted. If one of the two parties does not fulfill its obligations, the other will be protected by the conditions of the contract. Automated transactions also eliminate potential human errors.

On the other hand, among the disadvantages, we find aspects such as the lack of international regulation of the blockchain, cryptocurrencies and Smart Contracts. This makes the technologies difficult to track and monitor in the global economy. In addition, they are also complicated to implement and impossible to change. The latter is considered an advantage in terms of security, although it also has aspects that reduce value.

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