Smart Contracts in Cryptocurrency

Smart contracts is another term that is commonly used within the cryptocurrency community. For the layman, this term can be intimidating if they do not know the meaning of the term. However, once the meaning is explained, the term and its implications become quite easy to understand. Also, the various applications of the smart contract become quite clear, once investors have a firm grasp on the meaning of the term.

In this article, we will provide a detailed explanation of what smart contracts are, what the advantages of these contracts are as well as how they apply to the cryptocurrency world.

What are Smart Contracts?

The concept of smart contracts can be easily understood by keeping the phrase code is law in mind. In the case of a regular contract, two parties come to an agreement. If certain predefined conditions are met, the parties are supposed to undertake certain actions. However, if the parties fail to fulfil their obligations, the issue is referred to the court.

Smart contracts also work in a similar manner. This is because the conditions of the contract are programmed onto the blockchain in the form of a series of if-then conditions. All the possible conditions which may result are programmed and the blockchain executes automatically either based on the time which has elapsed or based on an event that has taken place. Hence, smart contracts automatically enforce the binding conditions leaving no chance for default.

Smart contracts can be triggered based on the information on the blockchain itself. Alternatively, it could also be triggered based on the information from the external world such as the interest rates or the value of the S&P 500 index. In such cases, smart contracts will have to be provided a clear and unambiguous way to derive this external data.

Smart contracts are not been widely used in the cryptocurrency community till now. However, they have been used extensively by Ethereum which is the second-largest cryptocurrency in the world after Bitcoin. This is the reason why large-scale acceptance of smart contracts is expected to take place in some time. Also, it needs to be understood that smart contracts are no longer expensive to develop. Earlier, the services of a programmer had to be engaged in order to develop a smart contract. However, now there are templates available that allow the implementation of smart contracts at a very low cost.

Advantages of Smart Contracts

The advantages offered by smart contracts are as follows:

  1. Smart contracts can be enforced by the contracting parties themselves. There is no need for an external agency to create and enforce the contracts. As such the amount of money being paid to intermediaries can be saved. This makes smart contracts more economical as compared to traditional contracts. Also, the time delays caused by these intermediaries are eliminated which leads to more savings.

  2. The information is available to all the parties involved in the contract. Also, this information is available on a distributed ledger. This means that thousands of people have copies of this information which can be called upon for backup. Therefore, the system can be considered to be highly secure with almost no chance of theft or hacking.

  3. Smart contracts are executed automatically. Hence, the risk of human error is eliminated. Also, the entire process is paperless which saves time and money which is spent in reconciling transactions in the back office.

Applications of Smart Contracts

Smart contracts are helping cryptocurrencies provide many financial services in different domains.

Some common examples have been mentioned below:

  • The letters of credit issued by banks are being completely reimagined using the smart contract model. Now, payments can be made in cryptocurrency just like earlier they were made using fiat currency using an “at sight” letter of credit. An example would be buyer A who buys goods from seller B which are shipped using the services of seller C. Now, as soon as seller C confirms that the goods have been received, the smart contract would release the funds. Hence, both parties can have the security of a letter of credit without actually having to involve a bank and paying them additional fees.

  • Smart contracts are helping streamline complex global supply chains. They are being designed to pay suppliers as soon as it is verified that certain conditions have been met. Faster cashflow is leading to the supply chain working in a more cohesive manner. Lead times are cut as a result of increased cash flow to the vendors.

  • Smart contracts pre-empt the various scenarios which could arise and program rules to deal with each one of them. The possibility of a dispute is almost eliminated. Since there would not be any dispute, it also means that the time and money spent in dispute resolution can also be put to better use.

  • Smart contracts also help users of cryptocurrency buy insurance using their coins. Traditional insurance companies are infamous for taking long amounts of time in order to process claims. The introduction of smart contracts can make the process seamless and also much faster

The bottom line is that the usage of smart contracts enhances the value of cryptocurrencies. This is because many financial services offered while using fiat currency are not offered while using cryptocurrency.

❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.