Smart Contract Advantages

Smart contract advantages in areas like speed, transparency and security are helping to accelerate the use of this blockchain tool.

What you will learn

  • Smart contracts present a range of benefits and are increasingly used in place of traditional contracts.
  • Practical use of Smart contracts in the real world

What you will learn

  • Smart contracts present a range of benefits and are increasingly used in place of traditional contracts.
  • Practical use of Smart contracts in the real world

As digital programs stored on blockchain networks, smart contracts present a range of benefits and are increasingly used in place of traditional contracts. When predetermined conditions are met, smart contracts automatically execute the outcomes. This differs from traditional contracts, which require a third party to oversee and enforce the execution. This is just one of many smart contract advantages that are helping to accelerate the use of this blockchain tool. text-based contract, cost-effective supply chain

Worded succinctly, smart contracts — using distributed ledger technology — are self-executing. This removes the need for intermediaries, such as legal professionals, brokers, and escrow. Smart contract execution can be seamless and clean. Paper-based contracts often come with unwanted transaction costs. Widespread adoption of smart contracts for efficient business processes is inevitable.

The benefits of smart contracts are too valuable to ignore. Blockchain smart contracts often work with off-chain resources, such as price feeds and other real-world data, using oracles to execute the desired outcomes. The if/then nature of how smart contracts function makes this technology perfect for many functions. Fortunately, it’s never been easier to create smart contracts.

Smart contracts in the real world

To explore a practical use of smart contracts, let’s use the example of a rental property agreement. A traditional contract is created between the landlord and the tenant to define the terms and conditions of the rental agreement between both parties. In the contract, you may have a condition that requires the tenant to pay their rent on the first day of each month.

If the landlord does not receive the payment from the tenant on the first day of the month, the landlord would need to instruct a legal professional to enforce the legal agreement. This process can often take days and result in considerable expenses for the landlord. If the landlord has a mortgage on the property, the delayed payment could affect their ability to pay the mortgage.

But what if the parties arranged things, so that smart contracts secure the payments each month. For instance, at the beginning of each month, through distributed ledger technology, a smart contract could execute the agreement automatically and transfer money from the renter to the landlord. The entire process could be done without either party lifting a finger.

It's easy to imagine similar applications in supply chain transactions or making insurance payments after an accident. There are some instances, however, where the qualities that make digital contracts valuable can become a burden. For example, if a business owner wants to give a loyal customer some flexibility on payments, that owner cannot stop the execution of a late-payment penalty.

What are the benefits of using smart contracts?

Speed and efficiency

When the conditions of a smart contract are met, it will immediately execute the desired outcome. This is different from paper contracts — which often lack speed or efficiency. To execute transactions with a written contract, parties often need to transfer payment through an intermediary or hold their funds in escrow. Traditional contracts can take days or even weeks to execute.

Immediate execution

With smart contracts, the terms are written as computer code and are executed when certain conditions are met. It’s binary. Once the conditions are met, the computer code will immediately trigger the desired outcome. From releasing money to transferring ownership, smart contracts can ensure that guaranteed outcomes occur once specific criteria are met.

Trust and transparency

The code is the contract — and it lives publicly on the blockchain for anyone to view. Blockchain technology's transparency inevitably helps create a clearer sense of trust. These types of contracts are often referred to as "trustless." There is no wiggle room for third parties to get involved and work deals on the side or take a cut during some intermediate stage. When all parties are aligned on the terms of a contract, this makes everything easier.

Security

When smart contracts have the power to execute functions based on specific terms, questions around security inevitably arise. To create a secure smart contract, you must ensure the code is robust and fit for purpose. With the right support, you can thoroughly test the code to guarantee it will successfully execute once predetermined terms and conditions are met.

Smart contracts can be hacked or falter because of bugs in the underlying code. For that reason, developers typically use one auditing service that checks contract coding line by line for potential problems. Also, data encryption can be used to store transactions on the blockchain to enhance security.

Accuracy and immutability

Smart contracts leave no room for tinkering or forgery. The computer code on the blockchain is fixed and cannot be altered. Once the code is written, and the contract is deployed, it can only execute the agreement as it was coded. This is ideal for contracts at risk of manipulation — bringing extra assurance to all parties involved.

Savings

Drawing up traditional, legally binding contracts can be expensive. Also, the expenses linked to the execution of these contracts can quickly spiral out of control as intermediaries take their cuts. Smart contracts do not require intermediaries to get involved in executing a contract, aside from oracles, although there typically are transaction fees.

Paper-free

The execution of paper-based contracts is often painstakingly slow. These require third-party involvement once specific conditions are met. Another problem with paper contracts is the need for these to get signed off by both parties. Smart contracts only require a digital key signature.

Storage and backup

Smart contracts are stored and run on the blockchain, which is essentially a decentralized, immutable, and publicly accessible database. Blockchain ensures all transactions are always recorded and visible to the relevant parties. As the data is stored on a distributed ledger, exact copies exist across all computers powering the network. Additionally, every computer has come to a consensus on the accuracy of this data. This means all on-chain smart contract data is trusted and redundantly available to access.

Conclusion

Are you open to exploring the use of smart contracts for your project? In web3, the only limit is your imagination. Using Smart Contracts and other native services offered by the public Hedera network, you can build decentralized applications, mint NFTs, tokenize real-world assets, and join the web3 revolution.