Blockchain: What Are Smart Contracts?

According to Fool, “Smart contracts are programs written on the blockchain that self-execute when certain conditions are met.” They’re written in a variety of programming languages (including Solidity, Web Assembly, and Michelson).

The term “smart contract” was first introduced by computer scientist and cryptographer Nick Szabo, who also conceptualized a digital currency called Bit Gold.

He offered the example of completing a transaction with a vending machine to illustrate its capabilities. Once a purchaser has inserted money into the machine, they’ve satisfied the conditions of the “contract.” The machine automatically honors the terms of the unwritten agreement and delivers the snack… essentially an “if-then” statement.

The idea of a smart contract can be broken down into a few steps.

• A smart contract needs an agreement between two or more parties.
• Once established, the parties can agree on conditions in which the smart contract will be considered complete.
• The decision would be written into the smart contract, which is then encrypted and stored in the blockchain network.

Potential benefits of this technology is building decentralized systems that can operate without needing a central governing body such as banks or payment processors. Multiple contracts can be bundled together to handle more advanced tasks.

A key challenge in the widespread adoption of smart contracts is that parties will need to rely on a trusted, technical expert to either capture the agreement in code or confirm that code written by a third party is accurate.

Many smart contract proposed use cases assume that the smart contract will receive information or parameters from resources that are not on the blockchain itself. Yet, smart contracts don’t have the ability to pull data from off-chain resources.  The code needs to be pushed to the network which may result in fluctuations that can cause the condition to be considered “not satisfied.”

A solution to this is the use of oracles, third parties that retrieve offchain information and then push that information to the blockchain at predetermined times.

There are many uses for smart contracts:

• Smart contracts can be used in a real estate deal. The property first needs to be digitized on blockchain technology. Once done, both parties can carry their deal using smart contracts.
• Smart contracts can be used for insurance—automating claims. The smart contract will facilitate the policy and make sure that it has all the proper documentation with the use of the technology. If the smart contract is set up with the right policy, documents, and ways to capture data, it can execute itself shortly after.
• Smart contract can be used for clinical trials, automating the data sharing between institutions and improving privacy.
• Smart contracts can be used for escrow, authenticating and improving trust. It's possible to automate the transaction between the buyer and seller as soon as the service provider submits its work.

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