What are smart contracts?
Nick Szabo, a cryptographer and a legal scholar, invented the concept of smart contracts in 1994. Szabo aimed to harness the power of a decentralized and distributed system into self-implementing contracts where the terms and conditions are embedded in a computer code that will be executed on the blockchain network.
Similar to traditional contracts, smart contracts are self-implementing contracts between a buyer and a supplier. These contracts avoid the requirement of a third party and let the buyer directly deal with the supplier saving time and money both. It allows an individual to exchange money, shares, property, important documents or any other kind of services in a hassle-free way while maintaining complete transparency.
A smart contract is also known as a crypto contract, and contains some conditions, rules and relevant penalties. However, unlike traditional, tangible contracts, if any one of the parties fails to live up to the contract or fails to follow the rules, the penalty is automatically executed and the process is reversed thus nullifying the agreement and canceling the exchange of assets or digital currencies.
The vending machine analogy
The principle underpinning the concept of smart contracts is the ‘if-then’ basis, which can be explained using the analogy of a vending machine. The vending machine possesses the services and goods. The buyer inserts money to retrieve the goods or services. If the payment is made then the services will be rendered.
The process of purchasing something from a vending machine is similar to that of executing a smart contract, except the process is carried out on the blockchain. The blockchain is an ongoing record of transactions, ensuring that each smart contract is executed with full transparency and security.
In a smart contract, the two parties involved in the transaction create a virtual contract that outlines states all the parameters that are then embedded in the code of the contract. The party requesting services sends the payment in cryptocurrency through the blockchain network and the other party is liable to render the services within the stipulated timeframe. If the terms of the smart contract are not fulfilled, the payment is automatically reversed and the agreement is nullified. Furthermore, all nodes on the blockchain are alerted about the agreement rendering no possibility of revoking the agreement.
What are the benefits of smart contracts?
- Safety: With absolute transparency provided by the blockchain network, the updates are visible to all the nodes on the network but no alterations can be made to the documents. Thus, it becomes really difficult for the hackers or other anonymous people to do changes within the contract.
- Speed: Manual processing of paperwork with traditional contracts requires time and labour. Smart contracts cut out that time and cost associated with the middleman required to process a traditional contract, which in terms reduces the potential for delays often associated with paperwork.
- Accuracy: Manual entry allows for a higher margin for error and higher rate of ambiguity, which can lead to confusion or room for misinterpretation. This risk is eliminated with a digitized smart contract.
- Trust: Smart contracts are encrypted in a public, open-source environment. This means that anyone can view updates on the smart contract, but they cannot edit or tamper with the terms due to the high level of coding. This eliminates the potential for misplacing the contract since the smart contract is stored throughout the blockchain network.
- Total Control: There is no external influence to change the decision of both the parties involved, giving complete power to them. Rest of the job is done by the system in an extremely safe and secure manner.
How can I get involved with smart contracts now?
UnitedBitcoin has a mission to optimize the usability of smart contracts, starting with the launch of Turing Complete Smart Contracts on the UB TestNet.
Unique to UB Smart Contracts is the support of coding in popular programming languages such as C#, LUA, and Java, so that users who have a basic understanding of computer programming may contribute to building and testing UnitedBitcoin’s Smart Contract ecosystem. Few cryptocurrencies have implemented smart contracts, and the way it has been implemented so far requires programming in specified unique programming languages with certain limitations.
Moreover, we will soon launch our own IDE (integrated development environment) for users to run software on your own computer to help us test the environment. For instructions on how to do this, visit Github. We welcome your feedback to helping us improve the UB Smart Contracts initiative.