What is Smart Contract?

Digitalization continues to transform every aspect of our lives, from financial transactions to legal agreements. One of the most innovative examples of this transformation is smart contracts, which appear as the contract model of the future. So, why is there so much talk about these digital agreements that radically change traditional methods? What is a smart contract and why does it have such a big impact? Continue reading our article to learn details about this concept blended with blockchain technology.

What Does Smart Contract Mean?

A smart contract can be defined as a programmable digital protocol or code. This protocol ensures that the terms of a contract are enforced without the need for outside intervention. It makes it possible to do it completely automatically. This system, which works thanks to blockchain technology, does not require any central authority. Thus, reliable and transparent transactions can be carried out between the two parties.

Blockchain refers to a technology where all transactions are kept on a decentralized, distributed ledger. Blockchain technology is behind the existence of smart contracts as digital transactions that are automatically triggered when certain conditions are met. The concept of smart contract is also widely used in the form of smart contract. Smart contracts can be used in many different areas, from financial transactions to supply chain management, and are an important component of blockchain technology.

Ethereum is one of the first blockchain networks to support smart contract platforms. The fact that Ethereum is widely accepted around the world makes it a smart It makes it a popular blockchain for running contracts. “What is a smart contract?” Now that we have basically answered the question, we can take a closer look at this issue.

What is a Smart Contract Used for?

Smart contracts basically enable the automatic execution of agreements. “What is a smart contract?” After the question, one of the most curious questions about this concept is what this system does. Smart contracts automating processes is functional for many industries.

We will share smart contract examples in more detail later in our article, but first, let’s take a look at this example. Take, for example, a securities transaction. Smart contracts can automatically carry out the transfer of securities immediately after the payment transaction occurs. This can speed up operations as well as reduce costs. Additionally, it minimizes errors and thus reduces the risk of fraud.

The usage areas of smart contracts are quite wide. That’s why we shouldn’t think only in terms of finance. For example, we can take the field of supply chain management. In this area, every step of the process from production to consumer can be tracked and verified. The information that a product leaves the factory is recorded in the blockchain. Thus, it can be analyzed whether the products are original and whether they meet certain quality standards.

Additionally, smart contracts can be used in real estate transactions, insurance policies, legal documents and many other areas. Smart contracts, which stand out as a reliable, fast and efficient tool in the digitalizing world, play a strong role in fully establishing transparency and trust between the parties by working integrated with blockchain technology.

How Does Smart Contract Work?

“What is a smart contract?” After addressing the question, it is necessary to look at how this concept works. Smart contracts are programs that run on a blockchain, and the working process consists of several steps from start to finish. This process can be summarized as follows:

1. Determination of Conditions: A smart contract contains all the conditions for an agreement in code form. These conditions determined by the parties are recorded on the blockchain.
2. Creating the Smart Contract: The smart contract is uploaded to the blockchain network. Since the blockchain is a decentralized formation, the contract prepared is open to public review and is in an unchangeable form.
3. Triggering: When the conditions specified in the contract are met (for example, a payment is made), the smart contract is automatically activated.
4. Execution: The smart contract automatically carries out the actions agreed upon when the conditions are met. For example, it allows you to transfer money, authorize a digital document, or transfer ownership of a property.
5. Recording the Results: Records of the completion of the contract are transferred to the blockchain. These records are accessible to everyone. This ensures transparency and reliability of the transaction carried out.

Thanks to this process, which involves the operation of smart contracts, transactions are completed quickly, securely, without intermediaries and economically.

Why is Smart Contract Important?

The reason why smart contracts are important is that they make transactions between parties as safe, transparent and efficient as possible. Unlike traditional contracts, smart contracts are built on blockchain technology. This is the reason behind it being an unchangeable digital protocol.

Thanks to automation, the risk of human error is eliminated and transactions are completed quickly. Additionally, eliminating intermediaries reduces costs and speeds up transactions. These advantages make smart contracts widespread in use in a wide range of areas, from financial transactions to supply chain management, making them one of the cornerstones of the digital economy.

Smart Contract Advantages

The advantages of smart contracts are important factors that are increasing the interest in this innovative digital and blockchain-based technology. The main advantages provided by smart contract can be listed as follows:

• Security: Smart contracts are known to be extremely secure as they run on blockchain technology. Blockchain contains a decentralized and encrypted structure. This greatly reduces the likelihood of contracts being manipulated or changed. This way, trust is established between the parties and the risk of fraud is minimized.
• Automation: Smart contracts are automatically activated if certain conditions are met. Thus, transactions can be completed quickly and error-free, without the need for human intervention. This means both saving time and having more efficient processes.
• Transparency: Since all transactions are recorded in the blockchain, the transaction process on the smart contract side continues in a transparent manner. Transactions and contract conditions can be accessed instantly. In this way, disagreements and uncertainties come to an end.
• Cost Savings: Thanks to smart contracts, there is no need for intermediaries such as lawyers, notaries and banks. This reduces transaction costs considerably. Since the existence of automation reduces the workload to be performed manually, businesses also save money at this point.
• Speed: Traditional contracting processes; It covers steps such as preparing, verifying and signing documents. This means that a certain amount of time is needed. Smart contracts can perform these processes both digitally and instantly. This means transactions will be fast.
• Flexibility: Smart contracts have a wide range of uses. Smart contracts can find a place in many sectors, from financial transactions to supply chain management, from insurance policies to real estate transfer.
• Timestamp: Since smart contracts are recorded on the blockchain, each transaction receives a timestamp. In this way, it can be proven whether contracts are fulfilled on time or not. This can actually be an important reference point if disputes arise.
• Universality: Smart contracts can be used wherever the parties are in the world. Thus, international transactions can be handled easily.

Thanks to these advantages, smart contracts become an attractive option for both individuals and businesses. Considering these advantages, smart contracts may become increasingly widespread and cause major changes in many sectors.

Smart Contract Disadvantages

While there are many advantages on the smart contract side, there are also some disadvantages and difficulties. These can be listed as follows:

• Irreversibility: The fact that smart contracts run on the blockchain means that once initiated, they are irreversible. If an error or disagreement occurs in the terms of the contract, this can cause a big problem. Making changes or fixing the error can be extremely difficult.
• Legal Uncertainties: Smart contracts may not be fully established within the legal framework in many countries. There may be some uncertainty regarding the legally binding and enforceability of smart contracts. This can pose a problem for the parties involved in disputes.
• Technical Complexity: Coding smart contracts with programming languages and blockchain technology requires technical knowledge. Considered this way, faulty coding may cause the contract to malfunction, as well as create security vulnerabilities. Additionally, the need for technical knowledge may make the use of smart contracts difficult for small businesses or individuals.
• Vulnerabilities: Although smart contracts are secure thanks to blockchain technology, coding errors or malicious attacks can lead to misuse of the contract.
• Limited Flexibility: Smart contracts work as they are coded and therefore may have limited flexibility to meet certain conditions. If in any case changes are required, the contract may need to be re-coded and initialized.

Smart Contract Examples

Examples specific to smart contracts would support a clearer understanding of this issue. Examples of smart contracts in the cryptocurrency world can be as follows:

1. Automatic Token Transfers: A smart contract can be used to distributetokens to investors when a crypto project reaches a certain goal. For example, during an ICO, tokens are automatically transferred to investors’ wallets. This ensures that tokens are transferred securely and quickly to the right people without the need for any manual intervention.

2. Decentralized Exchanges (DEX): Indecentralized exchanges, users can exchange cryptocurrencies thanks to smart contracts. For example, if a user wants to buy a token in exchange for Ethereum (ETH), the smart contract can automatically handle this exchange.

3. Staking and Yield Generation: Smart contracts can serve users who want to earn returns by staking (locking) their cryptocurrencies, thanks to smart contracts. Thanks to the smart contract, users can automatically receive their reward when the staking period expires.

We mentioned that the use of smart contracts is not only in the cryptocurrency world. The following examples can be given for real-life smart contract examples.

1. Automated Lease Agreements: Lease agreement can be managed by smart contract. On the day the rent is paid, the incoming payment is verified and the tenant maintains digital access to the house. In a scenario where rent is not paid, the smart contract can restrict access to the house.

2. Digital Copyrights: Smart contracts can be used in digital sales processes. For example, an artist can automatically receive a royalty fee every time their song is streamed.

3. Insurance Claims: Let’s say a flight is delayed. In this case, the smart contract can verify the airline’s data and automatically ensure compensation is paid, taking into account the terms of the insurance policy the customer has.