Blockchain: What is a Smart Contract?
One of the major advantages of using blockchain technology is that we now have the ability to cut out the middleman when we are making transactions. For us this means saved money and time, while also avoiding conflict.
So — how do we complete transactions without a middleman if we still want to have rules and penalties? We use smart contracts.
What are smart contracts?
Smart contracts are an essential part of blockchain platforms. It is a computer program code that facilitates and enforces the rules for a transaction to occur. These contracts work when triggered, so, “if this happens, then do that”. It is completely automated, verified by many computers, and can be used to complement or even replace a legal contract.
How do they work?
Think of it this way.
Let’s say you were ordering an eBook online. For this scenario, the website says that the e-book will be delivered to your email inbox in 10 minutes or less, or you get a refund.
You go to the website, select your eBook, enter your credit card information and then wait for it to arrive. Your eBook takes 13 minutes to arrive but you don’t bring up the “10 minutes or less” rule because it was close enough, and contacting customer service is time consuming.
Now, if you were to do the same transaction through a blockchain platform with a smart contract, it would go like this:
You would pay for your eBook in cryptocurrency and receive a receipt that is held in the smart contract. The eBook supplier would send the book. If it does so on time, the system will automatically release the book to you and the payment to the supplier simultaneously. This is because IF both parties provide their respective items for the transaction THEN they will be simultaneously released.
If your book has not been received within 10 minutes, the blockchain would release your refund. This is because IF your book is sent later than 10 minutes THEN you receive a refund.
How about a visual
Smart contracts can be used in a variety of industries. Take buying or selling a home, for example.
While this probably makes some people squeamish, you can significantly cut your costs by encoding your contract on the ledger instead of working with a middleman.
What makes them better than traditional contracts?
Aside from cutting out the middleman, there are various other ways that using blockchain and smart contracts can work to your advantage.
-Trust — You won’t have anyone coming back to you because they misplaced your contract
-Safety — Your documents are kept safe via cryptography (a high level of encryption)
-Accuracy — Since your contracts run on code and are not filled out manually, which also allows maximum efficiency, you can avoid traditional issues that can cost time and money
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