The Basics of Smart Contracts You Should Know About

The development of Blockchain technology is progressively revolutionizing day-to-day practices in unimaginable ways. An excellent example of this is the invention of smart contracts. This innovative method to catalyze transactions between two parties or more is the future of selling tangible and intangible assets.

Behind the scenes, there is a lot involved in creating and executing a smart contract. However, on the front-end, the process has been simplified immensely. To give you an overview of how smart contracts work, here are the most important fundamental elements.

How smart contracts work

Smart contracts completely replace the current agreement structuring method requiring witnesses or lots of paperwork. Quite simply, smart contracts use blockchain technology to execute contractual arrangements when the stipulated action steps have been completed according to benchmarks set on the contract. There are dashboards for managing contracts on the blockchain.

Sirion Labs dashboard goes the extra mile by determining potential risk and indicates actionable steps to rectify the identified loopholes. The smart contract system is entirely autonomous and can even facilitate agreements that could have required escrows before. Contractual arrangements conducted through the blockchain use the decentralized architecture of this technology.

Decentralized contract architecture

What does decentralized contract architecture look like from the inside? The technology powering blockchain systems does not have centralized servers or a mainframe. Instead, decentralized computers globally power the transactions conducted on it, similarly to cryptocurrency.

When a user assembles a smart contract on the blockchain, the computers fulfilling that contractual arrangement have transparent access to the clauses and agreements. As a result, when all parties have fulfilled their end of the contract, the agreed-upon terms are autonomously completed. For example, this could be monetary payment or assets that make up the smart contract.

Main characteristics of smart contracts

The main characteristics of smart contracts include self-verification, self-execution, and being free of tampering. Once the terms and clauses of the contract are set out to the blockchain, they are sealed but transparent to the decentralized computers fulfilling that contract. The involved parties have to clearly and definitively satisfy the terms stipulated on that particular contract.

If the terms are clearly satisfied, that’s only when the agreement is fulfilled. As a result, the main characteristic of smart contracts is the guarantee that each party fulfills the agreed-upon terms. Whatever the clauses stipulate is guaranteed for both parties to get their end of the deal.

Benefits of blockchain-powered contracts

Blockchain-powered smart contracts are beneficial to the parties involved since these agreements significantly reduce costs. The cost reductions are both short-term and long-term since smart contracts prevent any subsequent legal expenses in the event of a contractual breach.

At the same time, in the short term, both parties save since they do not need much legal intervention when drafting and signing the agreement. In addition, sometimes traveling expenses are involved in assembling and executing a traditional contract. All of those expenses are saved when all business dealings are conducted through smart contracts.

Real-life application for this technology

Smart contracts have endless applications since they can apply to personal and professional agreements. Some of the most popular real-life applications of smart contracts include investments like real-estate or non-tangible investment opportunities. Both parties can agree on the terms and clauses and upload them on the blockchain for transparent fulfillment.

On the other hand, the insurance industry can also use smart contracts to automate the process of qualifying and paying out claims. For example, when users opt for an insurance company, the service provider can stipulate what qualifies a claim. Then, by the time the user needs to claim, the blockchain will verify whether or not the claim qualifies for a payout. Using smart contracts in this capacity can help expedite waiting periods on claims and minimize paperwork for insurance companies.