One question that a substantial portion of people asked when Ethereum was launched was “Why to develop Ethereum when we already had Bitcoin for the transfer of payments?”
Well, Blockchain is a powerful technology and it is true that we haven’t fully utilized it to its potential. Bitcoin only makes use of one of the many possible applications of the Blockchain technology i.e. peer-to-peer transfer of funds.
Ethereum is a platform based on the Blockchain technology used for developing decentralized applications. It has a few benefits over Bitcoin such as the feature of coding Smart Contracts and the Ethereum Virtual Machine.
What is a Smart Contract?
Simply put, Smart Contracts are a digitized version of a traditional contract. They are computer programs which run on the Blockchain database and can be programmed to self-execute when the conditions written in their source code are met. Smart Contracts are trusted by the users as once programmed, the terms of the contract cannot be changed thus making the contract immutable.
Smart Contracts are coded using the language ‘Solidity’ and offer numerous advantages over traditional contracts:
There is no dependence on a third party for the enforcement of the contract. The elimination of the middleman considerably reduces the total amount of money spent on the contract.
Eliminating third party vendors also mean that the entire process of validation and enforcement of the contract becomes speedy as the users are directly transacting with each other.
Since the terms of the contract cannot be changed, the users are at a lesser risk of being cheated. Smart contracts are free from all kinds of human intervention.
Smart contracts are not prone to failures such as power cuts, node failures etc. There is no risk of misplacing or losing the contract as the contract is saved on a distributed ledger. What this means is that each device connected to the network has a copy of the contract and the data stays on the network forever.
How does a Smart Contract work?
Developers work on writing the code for Smart Contracts. The Smart Contracts can be used for the transaction and(or) exchange of anything between two or more parties. The code contains some conditions that will trigger the contract to execute itself.
For example, a Smart Contract relating to a rent agreement for an apartment would only get triggered when the owner receives the rent and would send the security key for the apartment to the tenant. This contract could be programmed to ensure regular payments of rent and could be reinitiated every month.
Once the coding is done, the Smart Contracts are uploaded to the Blockchain network i.e. they are sent to all the devices connected to the network. Relating this to another Blockchain application – Bitcoin – the upload is like how a network update regarding a Bitcoin transaction would be uploaded onto the Blockchain.
Once the data is uploaded onto all the devices, the users come to an individual agreement with the results of the execution of the program code. After the users have reached an agreement, the database is updated to record the execution of the contract and to monitor the terms of the contract to check for compliance.
Here, there is no possibility of the contract being manipulated by a single party as control over the execution of the Smart Contract does not lie in the hands of any single party anymore.
Potential use-cases for Smart Contracts
Smart contracts are already becoming pivotal for many Blockchain applications and will most likely become one of the most important pillars of the Blockchain technology. We are already seeing Smart Contracts being used in fintech and non-fintech domains with new use-cases coming up daily.
Some fields where Smart Contracts can be successfully used include:
Supply Chain Management - Supply chains are vulnerable to paper-based systems, where forms pass through several channels for approval thus increasing exposure to fraud, theft and other setbacks. Blockchain annuals such setbacks by providing a safe and accessible digital version to each party participating in the chain and automates the process of payment.
Governance - Smart Contracts could be used to provide a more secure and flexible ecosystem to the voters where voters need not come to the polling booths but can transfer their votes from anywhere since they’re already participating in a contract initiated by the governing authority. All it would need for the completion of the contract – an internet connection.
Real Estate - Using Smart Contracts, many hassles surrounding payments to the broker, advertising firms and similar costs could be nullified as the Blockchain ledger would help us cut costs and the tenant and the owner would be able to directly transact with one another.
Protecting Intellectual Property Rights - IPR can be enforced using Smart Contracts, which allow the users to track ownership of any file uploaded onto the network. Content creators can participate in Smart Contracts with other users, allowing the creators to get due credit for their content and be compensated easily since there is no need for any third-party intermediary.
What lies in the future for Smart Contracts?
The Blockchain technology is being integrated with multiple aspects of an average user’s life. Also, Smart Contracts are becoming an important pillar of Blockchain.
Both Blockchain and Smart Contracts have use cases that have not been fully explored but constant research is being done on the same, with many big companies investing heavily in the research and development of these technologies.
By Ayush Varshney, CTO and Co-Founder, Darwin Labs
Disclaimer: Darwin Labs is building applications and infrastructures on Blockchain, Virtual Reality and Artificial Intelligence. Before Darwin Labs, Ayush was a co-founder at two companies – Bluegape and Murmur. His love for new technologies is what drives the whole company to push the boundaries of the imagination of what’s possible.