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Finance

Smart Contracts and beyond

In this article, we are going to talk about the smart contracts.

What are smart contracts?

Smart contracts are lines of code that are stored in a blockchain and are automatically executed when the default terms and conditions are met. At the most basic level, they are programs that run as they were configured to be executed by the people who developed them. The benefits of smart contracts are more evident in business partnerships; in which they are generally used to enforce some kind of agreement so that all participants can be sure of the outcome without the participation of an intermediary.

What do smart contracts really do?

The coolest way to describe what a smart contract does is through an example. If you ever bought a car from a dealership, you know that there are several steps and it can be a frustrating process. If you cannot pay for the car directly, you must obtain financing. This will require a credit check and you must complete several forms with your personal information to verify your identity. Along the way, you will have to interact with several different people, including the seller, the finance broker and the lender. To compensate for your work, several commissions and fees are added to the base price of the car.

What smart blockchain contracts can do is simplify this complex process that involves several intermediaries due to lack of trust among the participants in the transaction. With their identity stored in a blockchain, lenders can quickly make a decision about credit. Then, a smart contract would be created between your bank, the dealership and the lender so that once the funds have been delivered to the dealership, the lender will retain the title of the car and the repayment will begin according to the agreed terms. The transfer of ownership would be automatic since the transaction is recorded in a blockchain, shared among the participants and can be verified at any time.

How do smart contracts work?

Smart contracts work by following simple “yes / when … then …” statements that are written in the code of a blockchain. A network of computers executes the actions (releases funds to the corresponding parties; registers a vehicle; sends notifications; issues a ticket) when predetermined conditions are met and verified. The blockchain is updated when the transaction is completed.

Let’s see how this develops in an example supply chain. Buyer B wants to buy something from seller A, so he deposits money into a deposit account. Seller A will use Sender C to deliver the product to Buyer B. When Buyer B receives the item, the money in deposit will be delivered to Seller A and Sender C. If Buyer B does not receive the shipment before Date Z, the money in deposit will be returned. When this transaction is executed, Manufacturer G is notified to create another item that was sold to increase supply. All this is done automatically.

Within a smart contract, there may be as many stipulations as necessary to satisfy the participants that the task will be completed satisfactorily. To establish the terms, participants of a blockchain platform must determine how transactions and their data are represented, agree on the rules governing those transactions, explore all possible exceptions and define a framework for resolving disputes. It is usually an iterative process that involves both developers and business stakeholders.

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