What is a Smart Contract? How does it work?
A Smart Contract is a system developed from Blockchain that helps businesses reduce costs, increase work efficiency, and significantly enhance the convenience of various systems.
A Smart Contract is a new form of contract that can automatically execute and enforce agreements on its own when predetermined conditions are fully met. It operates on Blockchain technology, which helps enhance security and reduce costs for businesses in various aspects. Therefore, understanding what a Smart Contract is and how Smart Contracts and Blockchain are related provides a significant advantage in conducting business in the digital age.
Article Contents
- What is a Smart Contract? What is its Function?
- How are Smart Contracts Related to Blockchain?
- How Do Smart Contracts Work?
- Advantages and Limitations of Smart Contracts
- What to Know About Smart Contracts
- Examples of Smart Contracts Today
- Smart Contracts: Transforming the Business World with Intelligent Contracts
What is a Smart Contract? What is its Function?
The Smart Contract is a concept that originated in the era of Blockchain 2.0. A Smart Contract refers to a set of commands or a computer program written to predefine the steps and conditions for a transaction, allowing it to be executed automatically on the Blockchain network without intermediaries such as banks. Both parties to the contract agree from the outset on the mechanisms and conditions before the system creates the contract itself based on those conditions. When a specified event is achieved, it helps to reduce complex procedures, save time, and significantly mitigate the risk of fraud that could arise from intermediaries.
To use Smart Contracts correctly and beneficially for a business, it is necessary to understand and operate them in accordance with the regulations of the Electronic Transactions Development Agency (ETDA).
How are Smart Contracts Related to Blockchain?
Smart Contracts are directly related to Blockchain, starting from the era of Blockchain 2.0 when Ethereum allowed programming on its network. This transformed Blockchain into a platform that not only records transactions in a decentralized and secure manner but also automatically executes the terms of a Smart Contract as predetermined by the contracting parties, without the need for an intermediary. This process helps to reduce complexity, save time and verification costs, and enhances the trustworthiness of agreements through encryption and consensus mechanisms on the Blockchain network.
Learning about Smart Contracts and Blockchain correctly and for the benefit of a business requires understanding and operating in accordance with the regulations of the Electronic Transactions Development Agency.
How Do Smart Contracts Work?
A Smart Contract is a system that operates under Blockchain technology, with predefined and correct working steps that can be adjusted according to specifications. It has the following basic working principles:
1. Defining conditions and agreements in digital form: A developer writes a program that records the agreements, conditions, and transaction rules into code. The Smart Contract operates on the Blockchain network.
2. Deploying the contract onto the Blockchain: Once the code is complete, it is deployed onto the Blockchain network, making the contract permanently stored and transparent.
3. Invocation by a transaction: When a user or system sends a transaction that meets the predefined conditions into the system, the contract is automatically invoked.
4. Verification and confirmation by nodes: Nodes, or computers in the network, use a consensus mechanism to jointly verify the validity of the transaction and confirm that it meets the conditions in the contract.
5. Executing the contract and recording the result: After verification, the system immediately executes the commands in the code. The result of the transaction is then recorded on the Blockchain, ensuring that all parts of the contract have the latest information and are always traceable.
Advantages and Limitations of Smart Contracts
The use of Smart Contracts has different advantages and limitations depending on the situation, which can be primarily categorized as follows:
Advantages
- Automatic and Fast Operation: Once the conditions are predefined, a Smart Contract operates automatically without waiting for approval from an intermediary, thus reducing time and complex procedures.
- Transparency and Security: Every transaction is recorded and encrypted on the Blockchain, making it traceable and significantly reducing the chances of fraud or forgery.
- Cost Reduction: Not having to rely on intermediaries such as banks or lawyers helps to cut costs associated with hiring them.
- Accuracy: Operating based on the written code reduces the risk of human error, ensuring that the execution will strictly follow the defined conditions.
Limitations
- Low Flexibility: Modifying a contract that has already been deployed on the Blockchain is very difficult and complex. Therefore, it must be carefully designed and reviewed from the very beginning.
- Code Errors: If the code has a vulnerability (bug), it could be exploited by hackers, directly impacting the users.
- Processing Limitations: The Blockchain is suitable for storing small amounts of data and relatively simple logic. Processing complex transactions or large amounts of data on the Blockchain is still costly and can be slow.
- Legal Issues and Acceptance: In many countries, there is still no clear legal framework to support Smart Contracts, which may limit their enforcement and proof in court.
What to Know About Smart Contracts
Before starting to use Smart Contracts, there are several things to know that can help a business leverage them more effectively. The interesting aspects of Smart Contracts include the following topics:
- Understand the basics: Start by understanding Blockchain technology and the working principles of Smart Contracts to know their advantages, limitations, and how to use them correctly, from writing the code to the contract's operation.
- Code carefully: Since a Smart Contract is immutably recorded on the Blockchain, a bug or vulnerability in the code can lead to loss of assets or other problems. Therefore, the code should be thoroughly reviewed, tested, and audited before actual use.
- Choose a reliable platform: Consider using major, widely supported Blockchain networks like Ethereum or Binance Smart Chain, which have tools and developer communities that help enhance security and stability.
- Manage security strictly: In addition to data encryption, use approaches like Penetration Testing and Security Audits from external experts to detect vulnerabilities and prevent attacks or unauthorized contract modifications.
Examples of Smart Contracts Today
Currently, Smart Contracts are being applied in various industries to create new innovations. The interesting and commonly seen examples mainly include the following:
- Decentralized Finance (DeFi): Platforms like Aave and Compound use Smart Contracts to create automated peer-to-peer or P2P digital asset lending and borrowing systems without going through a bank.
- Cross-Border Transfers: Smart Contracts help make international financial transactions faster and cheaper in fees. The system processes the transfer immediately once the conditions are met.
- Patient Data Management: Smart Contracts can securely and transparently record and control access to patient health data in clinical trials where they are being tested.
- Real Estate: Specially designed systems like Propy use Smart Contracts for purchase-sale agreements and title transfers on the Blockchain, helping to reduce paperwork and fees.
- Music Royalty Management: Platforms like Audius and Royal use Smart Contracts to automatically distribute royalty payments to artists when their work is streamed or sold.
Smart Contracts: Transforming the Business World with Intelligent Contracts
The Smart Contract is a key innovation that is revolutionizing the way transactions are conducted in the digital era. With its ability to operate automatically on a transparent, secure, and intermediary-free Blockchain network, it has become a powerful tool. Despite limitations in development complexity and legal frameworks, the benefits derived from cost reduction, increased efficiency, and building trust in business systems make the Smart Contract a crucial tool with high potential to drive the future of business in almost every industry, whether it be finance, real estate, data management, or copyright management. Those interested should study the fundamentals and legal requirements to understand them before actual implementation.
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References
1. WHAT IS A SMART CONTRACT ?. (September 29, 2018). Electronic Transactions Development Agency. https://www.etda.or.th/th/Useful-Resource/knowledge-sharing/articles/What-is-Smart-Contract.aspx
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