What is a Smart Contract and how does it work?

The systems that include a transaction between the counterparts in the code by running it automatically without any human intervention are called Smart Contract or Smart Contract.

Smart contracts are like vending machines powered by money. The transaction is automatically completed as soon as the required digital asset is transferred to the environment where the smart contract is valid. By applying all the rules of the network protocol, the transfers are automatically applied by the smart contract.

Why are smart contracts used?

Suppose there will be real estate sales between two people. In the purchase and sale of immovables, many paperwork and communication with different institutions and people are required. There are many risk points from the beginning to the end of the process. Consequently buyers and sellers; It negotiates with a real estate agent who will deal with all kinds of bureaucratic affairs, market the property and act as an intermediary between the interlocutors.

Intermediaries who assist in all these processes in real estate buying and selling transactions, to which a large amount of money is transferred from person to person, receive commissions on the total amount. Even though the transaction has been executed perfectly, the higher the amount, the higher the commission fee paid.

In addition to real estate sales, which we have given as an example, intermediary institutions and high commission fees are observed in international agreements, giant logistics operations and transfer transactions that require high security.

In all these processes, using smart contracts can eliminate the problem of trust. Smart contracts operate fully automatically, on the principle of “if the following condition is met, then apply”. In other words, the ownership of the real estate passes to the buyer only after the agreed amount is sent to the system.

Ek okuma: What is Zero Knowledge Proof?

The code in the smart contract contains all the terms and conditions accepted by the parties. Transaction information is recorded on the blockchain in a decentralized and open ledger.

Working structure of smart contracts

Just as they can work on their own, smart contracts can also be integrated with different code structures. In other words, after completing the code operation in a smart contract, it can trigger the activation of another contract.

In order for smart contracts to start working, the parties must first sign. Then, access is provided to the object that the contract has the right to access directly. This object can be any asset, such as a real estate, automobile, government documents or money. After the terms of the agreement are fulfilled, the ownership transfer is completed.

Pros of smart contracts

Automated smart contracts give users full control, eliminating the need for intermediaries or third-party service providers.

You may be interested in: What is 51% Attack (51%)? Is it Possible to Attack Bitcoin by 51%?

Data is archived in an encrypted and secure manner in a digital ledger that can be audited by the parties. These data cannot be captured or deleted by anyone. More importantly, there is no need for an atmosphere of trust between you and the other party.

Thanks to smart contracts, there is no need for a notary public, real estate agent, expert or similar intermediary, thus saving from commission fees. If implemented correctly, smart contracts cannot be misused by cyber attackers. Smart contracts also make it possible to save time by making paperwork and physical transfers a thing of the past.

Cons of smart contracts

It is very important that the code structure that creates the contract is flawless and error-free. Having an error in the code or finding a security vulnerability that could lead to abuse can have bad results. Coins deposited in the smart contract with an error in its code can be stolen.

Because smart contracts are so new technologies, it is difficult for governments to audit these contracts right now. As no idea has been put forward on the taxation issue yet, the chances of regulators to intervene in a problem arising between the parties will be limited.

The problems that can be solved with the court in traditional contract structures, blockchain and the “Code is the Law” logic in smart contracts can lead to a difficult situation.

You may be interested in: What is a DApp? How does the decentralized application work?

Check Also

S&P 500 Chart Signals More Trouble for Bitcoin, Risk Assets

Bitcoin dropped to one and a half-month lows Monday, alongside sharp losses in global equity …

Leave a Reply

Your email address will not be published. Required fields are marked *