An Introduction to Smart Contracts

A contract is an agreement containing a set of terms and conditions which are set between any two or more transacting parties.

"A ‘smart’ contract is when those terms and conditions are codified and thereafter, the contract exists digitally."

Such contracts allow transactions between anonymous and disparate parties without the need for a central authority or a third party enforcement mechanism.

This has several advantages:

1. Fast and accessible - Since all activities happen over-the-air, they are fast, require no physical presence, and hence, are more accessible to people, even in remote areas.

2. Secure - Smart contracts take care of trust and privacy concerns through cryptography because everything is recorded on the blockchain and thus, is immutable and irreversible.

3. Fully automated and Trustless - In the traditional systems, we need to trust the central authority. However, since the code itself works only when conditions are met, it is self-enforced. Hence, this system becomes trustless.

4. Also, these contracts cannot perish like traditional paperwork.

Keep reading to know about some interesting applications of smart contracts in various domains: (NFTs have their own section!)

1. Banking - Loans can be extended automatically if the comprehensive rating of a prospective borrower is above a pre-defined standard. This rating can encompass the credit scores from various credit rating agencies, past records, whether or not the person already has an account in that bank, occupation and salary, and anything else that a bank desires.

This also works the other way: smart contracts can be configured to deduct the repayment amount at each due date. This is similar to Automated Clearing House transactions, but additionally uses the blockchain to record all the transaction information immutably.

4. Voting - Voting can entirely be done online. A contract that digitally identifies a voter and verifies whether or not that person is a citizen of this country and is above 18 years of age can be established. Once a person has cast his vote, he can not vote again, because the information of his vote is already recorded on the blockchain with an identity- and a time-stamp and an attempt to vote again will clash with existing records, forbidding a re-vote.

Challenges ahead:

1. It's code after all - No matter how secure the underlying cryptography is, the current state of advancements do not ensure 100% security against bugs or hacking.

"Smart Contracts are not 100% hack-proof."

2. Taxation issues - There is no clear view regarding how the governments will tax the smart contract facilitated digital transactions. A recent bad example of handling crypto taxation is the Indian governement's 30% tax on crypto gains which severs the pace of innovation in the country. (Read this blog for more details on this)

3. Regulation issues - Since smart contracts will facilitate transactions on a global scale, there is a need for global standards with regard to the regulation of such contracts. That is, smart contract policies should be consistent across borders.

To conclude, we see that although there are many technical and policy issues that need solving, smart contracts in the near future are likely to change some of the most fundamental ways in which activities are carried out in today’s time.

Thus, smart contracts do have the potential to lead people into an automated, trustless, and a more convenient future.