A smart contract It is a computer programme that uses a unique code to define a set of conditions which, if met, trigger certain actions. In other words, it is a contract that is self-executing as the parties involved update it and fulfil its terms.
Based on the technology of blockchain, smart contracts are a a secure way of automating certain contractual obligations between all parties. For example, a company that imports a raw material can set a payment deadline in a smart contract, and the supplier can specify delivery dates. In this way, these actions will be carried out automatically without any external intervention.
What is the technology behind a smart contract?
Smart contracts are made possible by blockchain technology. In this case, each contract represents a block containing all the relevant information.
The interesting thing about this is that:
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Each smart contract has a unique code embedded in it, called hash.
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Each smart contract contains two codes in its hash: its own hash and that of the previous contract.
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If even a single byte of the file is changed, the hashes will change completely in sequence.
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This hash is used as a password that prevents unauthorised access. That is why it is said that blockchain technology ensures the immutability of data.
Advantages of smart contracts
Smart contracts have undeniable advantages over paper or purely digital contracts:
Speed
The clauses of smart contracts are written in code and are executed instantly and automatically when certain conditions are met, unlike traditional contracts, where all actions must be carried out manually.
Security and transparency
Blockchain technology prevents any external party or individual from amending the contract on their own initiative, meaning that none of the parties can evade their responsibilities in a dishonest manner. Furthermore, a well-programmed smart contract leaves no vulnerabilities unaddressed and prevents any hacker from maliciously manipulating it.
Safe and sound
Smart contracts are stored on a blockchain network, that is to say, in a public database (which all parties involved can view but not modify) that is immutable and decentralised. All computers with access to the contract hold virtual copies of it, meaning that the contracts cannot be lost.
How does a smart contract work?
A smart contract is not so different from the concept of a traditional contract. Let’s imagine we sign a smart contract for a tenancy. This contract contains the usual details: the amount of the rent, the payment date, the tenant’s rights, the landlord’s obligations and any other clauses.
However, in a smart contract All clauses are defined in a programming language which specifies certain conditions that must be met for predetermined actions to be carried out.
For example, if the tenant does not pay the rent by the 10th of each month, access to the flat is blocked (let’s imagine that everything is digitised). Transactions from the tenant’s bank account to the landlord’s can also be automated.
What is a smart contract used for?
A smart contract can be used in any situation where a traditional contract could be signed on paper with a pen. That said, these are the sectors in which it is most commonly used:
Music and art
Artists are often self-employed professionals who are frequently involved in complex, lengthy and multi-party negotiation processes. Thus, in a smart contract, all payment obligations are set out and automated. These contracts specify the percentages to be received by all parties involved, such as the artist or the production company, which takes its share of the profits.
Supply chain
Such smart contracts are also commonly found between raw material suppliers and companies. These contracts therefore set out all the payments and obligations within a logistics chain involving companies at every stage.
Property sector
Smart contracts simplify the process of buying and selling property. Let’s imagine you want to buy a flat. The contract would set out the terms of the sale, such as the price, the handover date and the responsibilities of the parties involved. Once the conditions are met, the smart contract would automatically execute the transfer of funds and ownership of the flat without the need for intermediaries.
Examples of smart contracts
Here are some examples of smart contract clauses by sector to give you an idea of how they work:
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Financial sector: If the balance in the user’s account falls below the minimum threshold of €500, the smart contract will automatically initiate a transfer from the linked account to top up the balance to the set threshold.
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Property sector: Once the full agreed payment has been received by the seller, the smart contract will automatically transfer ownership of the property to the buyer, so that the transfer is recorded on the blockchain.
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Health sector: If the patient grants access to their medical data to a specific provider, the smart contract will allow access to the medical information stored on the blockchain for the authorised period.
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Logistics sector: The smart contract will release the payment to the supplier once the system confirms that the goods have been delivered to their final destination and have been electronically signed for by the recipient.
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Energy sector: The smart contract will automatically calculate and generate an invoice at the end of each energy consumption cycle, based on the consumption data recorded in real time on the blockchain.
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