What are Smart Contracts? Redefining Transactions in Software Development

A smart contract is a digital agreement signed and stored on a blockchain network, executed automatically when its terms and conditions are met. These contracts form the foundation of most blockchain use cases, from NFTs to decentralized apps and the metaverse.

This article explains how smart contracts work, their various types, top smart contract tools, and best practices for their use.

Types of Smart Contracts:

Smart contracts can be categorized into three types: legal contracts, decentralized autonomous organizations (DAOs), and logic contracts, which will be discussed in detail in this text.

Decentralized autonomous organizations (DAOs):

DAOs are democratic groups governed by smart contracts, with voting rights. They operate as blockchain-governed organizations with a shared objective, without an executive or president. Blockchain-based tenets regulate operations and allocation of funds. VitaDAO is an example of a DAO, powering a scientific research community.

Smart legal contracts:

Smart contracts, based on blockchain technology, are legally guaranteed and offer greater transparency than traditional contracts. They adhere to the "If this happens, then this will happen" structure, with parties executing contracts with digital signatures.

These contracts can be executed autonomously if certain prerequisites are met, such as making a payment on a specific deadline. Failure to comply could result in severe legal consequences.

Application Logic Contracts (ALCs):

Application logic contracts (ALCs) are code-based smart contracts that are synced with other blockchain contracts, enabling interactions between devices like IoT and blockchain integration. These contracts are not signed between humans or organizations but between machines and other contracts.

How Smart Contracts Work?

As mentioned earlier, a smart contract is a binding agreement between two parties using blockchain technology to enhance efficacy, openness, and confidentiality.

The Agreement:

It is executed using simple "if/when…then" statements on the blockchain. To function, parties must agree on the terms and conditions of the contract and determine the operation criteria for the agreement to be fulfilled. This ensures transparency and accountability in business transactions.

Contract Creation and Deployment:

Smart contracts can be created by transaction participants or providers, and their provisions are coded in a programming language. Security is crucial during this stage. Once finalized, the contract is published on the blockchain, similar to regular crypto transactions.

The code is inserted into the exchange's data field, and once verified, the transaction is considered active and cannot be reversed or amended.

Monitoring and Execution:

A smart contract operates by tracking the blockchain or a reliable source for predetermined conditions or prompts, which can be digitally verified like a date or payment.

When these conditions are met, the smart contract is activated using an "if/when…then…" statement, implementing actions like passing funds to a vendor or registering the buyer's possession of an asset.

The blockchain system verifies contract execution results, logs their completion as an exchange, and stores the concluded agreement on the blockchain, making it accessible at all times.

Applications of Smart Contracts:

Here are some of the most prominent applications of smart contracts:

B2B Data Platforms:

A data marketplace is a platform where users can buy and sell diverse datasets or data streams from various sources. Intelligent contracts enable the creation of dynamic, fast-evolving markets, facilitating automated and secure transactions without human intervention, like Datapace.

Royalty Payment in Media and Entertainment Industry:

New artists in the streaming industry rely on streaming services for revenue. Smart contract apps can simplify royalty payments, allowing instantaneous handling for record companies and artists.

This technology also addresses royalty distribution challenges in an OTT content world where traditional network agreements don't apply, enabling emerging artists and lesser-known actors to receive small, regular payments.

Supply Chain Management:

Smart contracts can operate autonomously without mediators or third parties, allowing organizations to create contracts for their entire supply chain without regular management or auditing. Any shipments exceeding schedules can trigger escalation measures for smooth execution.

Healthcare Industry:

Smart contracts can enhance healthcare by improving data recording efficiency, promoting clinical trials, and ensuring accurate patient records, thereby enhancing appointment management.

Digital ID Cards:

Smart contracts allow users to store reputational data and digital assets, creating a digital identification card. When linked to multiple online services, external stakeholders can learn about individuals without disclosing their true identities.

This includes credit scores for loan verification and resumes for hiring, reducing the risk of demographic profiling and gender bias.

Real Estate:

Smart contracts can expedite property ownership transfers by autonomously creating and executing contracts, assigning control to assets based on the blockchain's payment record, following buyer payment to vendors.

NFT Tokens:

Smart contracts enable the creation of non-fungible tokens (NFTs) by assigning ownership and managing movable digital assets. These contracts can be modified with royalties, access rights to platforms, or software, treating digital assets like physical ones with tangible value.

In Conclusion:

Smart contracts can revolutionize digital transactions by enforcing immutable terms and conditions, ensuring transparency among stakeholders. Gartner research predicts that adoption of smart contracts could significantly improve data quality by 2025.

However, challenges like skills shortages and inadequate support can be addressed over time. Understanding smart contracts and their development tools is crucial for organizations to fully utilize technology in the decentralized web era.