What are Smart Contracts?
Simply defined, smart contracts are programs stored in a blockchain that run when predetermined conditions are met. They are often used to automate the execution of a contract. In this way, all participants have the opportunity to reach the results immediately, without the involvement of any intermediary or loss of time. It automates a workflow by triggering the next action when pre-agreed conditions are met.
Smart contracts are written in virtual language and have the power to execute themselves autonomously based on a set of programmed parameters. It strengthens security, transparency and trust between signatories, prevents changes and eliminates the need for intermediaries.
Similar to traditional contracts, smart contracts define rules and penalties around an agreement and automatically enforce these obligations. While they can work independently, they can also be implemented with many smart contracts.
The integral components of a smart contract are called objects. There are basically three objects in a smart contract — signatories, which are the parties involved in smart contracts; subject of agreement or contract; and certain terms.
Historical Background of Smart Contracts
To understand smart contracts, we can take a brief look at the history of this concept. The term was first introduced by computer scientist and cryptographer Nick Szabo nearly 20 years ago while he was a graduate student at the University of Washington. Szabo conveys the term as follows;
New institutions and new ways of formalizing the relationships that make up these institutions are now possible with the digital revolution. I call these new contracts “smart” because they are much more functional than their lifeless, paper-based ancestors. The use of artificial intelligence is not implied. A smart contract is a set of commitments specified in digital form, including protocols by which the parties fulfill these commitments.
An academic study held in 2018 in research It is stated that smart contracts may be smarter than paper contracts because they can automatically execute certain pre-programmed steps, but they should not be seen as smart tools that can analyze the more subjective requirements of a contract.
How Do Smart Contracts Work?
Smart contracts work by following simple “if/when… then…” statements written into code on a blockchain. A computer network executes actions when predetermined conditions are met and verified. These actions may include depositing money with the appropriate parties, registering a vehicle, sending a notification, or issuing a ticket. The blockchain is then updated when the transaction is completed. This means that the process cannot be modified and only permitted parties can see the results.
First, the contracting parties must determine the terms of the contract. Once the contract terms are finalized, they are translated into programming code. Essentially, the code represents a series of different conditional statements that describe possible scenarios of a future action.
Once the code is generated, it is stored in the blockchain network and replicated between participants in the blockchain.
The code is then run and executed by all computers on the network. If a condition of the contract is met and verified by all participants of the blockchain network, the corresponding transaction is executed.
Three Different Concepts of Decentralization Can Be Mentioned
So, where do these contracts work?
We list the following as examples of some of the most widely used platforms for developing and executing smart contracts on blockchain.
Ethereum: Smart contracts are written in a programming language called Solidity and executed by the Ethereum virtual machine. The Ethereum platform is widely known as a choice.
Hyperledger: Developed by the Linux Foundation, it is recognized as an open source system that is a flexible platform on which non-cryptocurrency smart contracts can be developed.
Counterparty: This platform incorporates data into Bitcoin transactions, meaning it uses the cryptocurrency’s blockchain and allows contracts to be developed on it.
Polkadot: It is an alternative to blockchain and is famous for hosting parachains, chains within chains, that allow more transactions than usual.
What Are the Benefits of Smart Contracts?
*Efficiency and Accuracy
Once a condition is met, the contract is executed immediately. Since smart contracts are digital and automated, there is no paperwork to process and no wasted time reconciling errors that often result from filling out documents manually.
*Transparency
Since there is no third party involved and encrypted transaction records are shared between participants, there is no need to question whether the information has been changed for personal benefit.
*Security
Blockchain transaction records are encrypted, making them very difficult to crack. Additionally, since each record depends on the previous and next records in a distributed ledger, hackers would need to change the entire chain to change a single record.
*Savings
Smart contracts eliminate the need for intermediaries to process transactions and therefore their associated time delays and fees.
These benefits make smart contracts important
Smart contracts may have the potential to revolutionize the way business is done online. Without additional enforcement by third parties, it can be faster and more convenient than traditional contract law, which translates to a financial advantage for businesses and consumers.
Additionally, since they are on the blockchain, they are decentralized and this makes smart contracts more secure. previous in the newsletter. As we discussed when explaining the concept of decentralization, there is no single point of failure or vulnerability to fraudulent actions. It helps reduce fraud and protect both buyers and sellers, with all parties having access to their funds at all times.
The development of smart contracts is also important for companies. One of the most important problems faced by companies is the lack of trust in dealing with third parties. Organizations lose time when making agreements due to lack of trust and transparency. But smart contracts are important because their terms are publicly visible. It makes it possible to create immutable and accessible contracts.
Let's Examine Examples Using Smart Contracts 🔎
From reputation data to digital assets, you can store components in a smart contract to create a digital identity. When smart contracts are connected to various online services, counterparties can obtain information about individuals without revealing their identities. Smart contracts may include credit scores that lenders can use to gauge potential risk.
For example, MyEarth ID is a decentralized Identity Management System that allows users to control their digital identity data and securely verify it with third parties.
One of the most exciting applications of blockchain technology and related smart contract technology is its ability to facilitate complex computational tasks, such as those related to machine learning and artificial intelligence (AI) . By combining it with the decentralized security and immutability of blockchain technology, AI has the potential to create AI-powered smart contracts.
As an example, Zilliqa is one of many blockchain platforms that develop advanced computing capabilities with its proprietary smart contract programming language.
We mentioned that smart contracts can work without the need for any intermediary or third party. Designing a smart contract for an end-to-end supply chain eliminates the need for day-to-day management or auditing. Any deliveries taken outside of schedule follow pre-agreed precautions to ensure a smooth operation.
Datahash is Australia’s first example of a full-service agricultural supply chain platform. It works to curb the $3 billion-a-year counterfeit wine market.
ReFi Türkiye Podcast 🎧️
🌱 Within the scope of the ReFi Türkiye program, our podcast series with pioneers who think and build on Web3 episode 10 is on air! In this episode, we talked with Gülcen Yayla about talent development in the Web3 field.
You can listen to the episodes about the intersection of web technologies and the impact ecosystem on Spotify, Apple Podcasts, Soundcloud and Spreaker. You can also buy NFTs that we prepared specifically for podcast episodes with the code you will hear in the episodes! 👀
We listened to our guest Gülcan Yayla’s own work and discussed the obstacles faced by young people in the digital economy, how to develop self-confidence in this field, cooperation dynamics and communication skills. We talked about the responsibilities of institutions in the Web3 ecosystem and Turkey’s position in blockchain technologies.
Watching Recommendation of the Week 🎥
imece Board of Directors member Buğra Çelik takes part in the broadcast, hosted by Çiğden Öztabak, on the MetaCafe channel. You can watch the episode where the meaning of the ReFi concept, the innovations that blockchain technology brings for the benefit of society, and young talents in the sector are discussed.