Smart Contracts and Blockchain: Understand why smart contracts are more secure than conventional contracts with the help of blockchain technology. Sheets and sheets of paper with fine print and notary stamps spread across the front page.
Cardboard boxes crammed with documents stacked in a filing cabinet. A person is responsible for organizing and searching through stacks of analog information.
They began to be discussed in the legal field with the popularization of cryptocurrencies and blockchain. In this article, you’ll discover why this technology has enabled a breakthrough in how contracts work.
What Are Smart Contracts?
Smart contracts are a contractual modality that allows the automatic execution of a pre-established agreement between the parties involved without the need for an intermediary.
They are 100% digital and consist of programming codes that stipulate rules that must be followed by the parties, just like in conventional contracts. They need to establish all the conditions before being transposed into the computational language because, after this process, the contracting parties cannot change the agreed terms.
Yes, an intelligent contract contains clauses, obligations, benefits and penalties. All information is programmed and validated through the blockchain, which accompanies the shared data and allows direct and encrypted communication.
Smart Contracts And Traditional Contracts
Reading the definition of a smart contract, you can see that it is quite different from conventional contracts.
The main difference between smart and traditional contracts is the absence of an intermediary to validate and monitor the agreement, as the rules are automatically applied without needing a third party.
How Smart Contracts Work
In general, the operation of smart contracts can be divided into five stages:
- Two parties decide to agree, i.e., a contract.
- This contract is encoded in a chain of blocks, the blockchain system. Each block is sent to the participating network of the system.
- The computers that participate in the network, the nodes, evaluate the operations based on the rules established in the contract. If 51% of the computers agree, the operation is considered verified.
- Each block has an algorithm that encrypts and creates a chain of records, making it difficult to forge.
- When a contract event is triggered, the code executes the contract object negotiated between the parties.
Seven Advantages Of Smart Contracts
We can summarize the advantages of smart contracts in 7 main points:
Due to encryption, intelligent contracts offer lower risks of fraud, unauthorized personal access, and document clauses modifications.
As they depend on computational language, the terms of an intelligent contract do not leave room for interpretation, which prevents errors and provides excellent reliability between the parties involved.
The contract can be accessed and revised at any time by the computers that make up the network, the nodes. This makes the process more transparent and avoids disputes.
Smart contracts reduce the time of a conventional negotiation, as they are executed automatically and practically instantly.
Easy Access To Backups And Old Contracts
A smart contract cannot be lost if one of the computers on the network stops working due to the separation of information into blocks. Each of the blocks holds records, which can be retrieved easily.
There is a significant reduction in bureaucracy, as smart contracts do not depend on an intermediary to be executed.
Remember the scene we described at the beginning of the text? With smart contracts, a law firm or legal department can eliminate the storage, printing, and notarization costs.
The advantages of intelligent contracts result from blockchain technology, which we will detail below.
What Does Blockchain Mean?
Blockchain is a decentralized database containing a permanent record of transactions. These are stored in blocks, which are linked together like a chain.
A key protects all blocks called a “hash,” a kind of encrypted signature. A change in the blockchain, such as a new transaction, leads to the creation of a new hash, an event that will be communicated to all people who have access to the database.
Network participants have a ledger, which gathers all the information on transactions. Each of them is responsible for validating, or not, the operations that take place on the blockchain without having to resort to an intermediary.
All actions on the network receive a digital stamp containing the date and time they were performed, making retroactive changes impossible. Therefore, smart contracts are considered unalterable and, therefore, more secure.
Check out sectors that have a lot to gain from the adoption of smart contracts:
- Insurance: a database on the degree of risk, when integrated into a payment system, allows the automatic release of compensation as soon as the insurer receives information about the claim.
- Music industry: the payment of copyrights is made automatically each time the item is used for commercial purposes, thanks to the recording of ownership of a cultural product on the blockchain and the implementation of a smart contract.
- Real estate: smart contracts provide more security for transactions involving large amounts of money, signaling more quickly when all clauses are fulfilled.
- E-commerce: in addition to security and speed, intelligent contracts distribute information about buying and selling behavior to all sellers in a marketplace.
- Logistics: Automating tasks and payments gives more agility and security to all parties involved in the chain.
- Bright goods: transforming goods (such as a house or a car) into tokens through cryptography is a way to ensure that only their owner can trade them. When held via smart contracts, tokens can be tracked, protecting them from fraud and other criminal actions.