Decoding the Enigma of Smart Contracts: A Comprehensive Guide
Buterin incorporated this concept into the blockchain and made it possible to use blockchains in a many use-cases
Contracts are a set of promises between two transacting parties where each confirms their obligations towards the exchange of valuables between them. It has been the traditional way of formalizing business or personal relationships between individuals and or institutions.
They are the basic building blocks of our economy and hence represent a very important part of our day-to-day activity.
Contracts have evolved over centuries of our existence and are repositories of information creating a history and a tradition that lends a safety net to our present-day behaviour and activities. As we move towards a digital environment, our contracts are also becoming smarter with a digital manifestation to them.
Unlocking the Power of Blockchain: Unleashing the Potential of Smart Contracts
The term ‘Smart Contract’ was first used by Nick Szabo — the creator of Bit Gold. In his paper ‘Smart Contracts: Building Blocks for Digital Markets’, Nick states: “New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution.
I call these new contracts “smart” because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in a digital form, including protocols within which the parties perform on these promises.”
Nick coined the term in 1994 and wrote out the paper in 1996. In 2013, Vitalik Buterin incorporated this concept in the domain of blockchain and made it possible to use blockchains in a plethora of use-cases in our lives — from enterprise solutions to personal ones. And today, we know the smart contract as a base for decentralized applications and even decentralized autonomous organisations build on smart contracts.
In its current avatar, a smart contract is a software program contractual agreement that auto executes itself when the promises written out in the contract are fulfilled by the parties involved in the contract.
It carries the traditional properties of observability; verifiability — the ability of a principal to prove to an arbitrator that a contract has been performed or breached; privity — the principle that knowledge and control over the contents and performance of the contract should be distributed among parties only as much as is necessary for the performance of the contract; and enforceability — along with minimizing the need of enforcement.
This auto-executing smart contract is programmed and its coding is often open-source for the entering parties to access freely and evaluate before entering into them.
Also, there are a large number of smart contract auditing firms / services like 0xGuard or CyStack to do such for you. Smart contracts also use the feature of escrow to ensure enforceability where the contract is only executed when the parties provide cryptographic proof of carrying out their obligations to the contract.
Till that time, the escrow just holds the assets on the behalf of the parties. This eliminates counterparty risk to contracts.
Smart contracts render the transactions traceable, transparent and tamper-proof. They also standardize the contents of the contract enabling unlimited re-use without rewriting the contract over and over again. The monitoring and execution costs are also minimized because of the elimination of counter-party risk and disintermediation.
Today, these contracts are even becoming smarter and being used in IoT, AR technologies. Smart contracts are the secret weapon that Distributed Ledger Technology is wielding to disrupt all current forms of business — building more efficient, cost-effective and secure operational processes in the traditional business operations.
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