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How Smart Contracts Work

Jul 19, 2023
Reading Time 5 Min
author of ilink articles
Kate Z.
About smart contract, how smart contracts work | Read ilink blog

The Conditions of Smart Contracts Are Predetermined

Modern, fast, and efficient solutions are needed in all areas of society due to the rapid development of technology. A smart contract is an example of such a solution. In other words, it is the software code that runs on the blockchain. Using mathematical algorithms and programming languages, it describes certain conditions. It is very important to write the correct terms of the agreement when creating a smart contract, because they become part of the distributed ledger when they enter the blockchain. As a result, they cannot be changed, rewritten, or corrected.

The conditions of smart contracts are predetermined from the beginning. It automatically performs the actions defined in it once the conditions are met. There must be a mathematical description of all terms and a clear logic for their execution in the contract.

So, what is the problem solved by smart contracts? A contract of this type may include a variety of functions, such as authentication, information storage, and payment processing. In spite of the fact that smart contracts are generally associated with financial transactions, they have a wide range of applications, including asset management and supply chain management.

What Is the Functionality?

This section does not describe the operation of a smart contract from a technical point of view, but aims to explain the execution of the contract through the examples provided.

Imagine that two parties decide to enter into such a contract. In a distributed ledger, they have written the terms of the contract as code. Smart contracts automate the execution of prescribed actions. It is the responsibility of both parties to fulfill their obligations. For example, you enter into an agreement with a company to make repairs to your house. Payments to the company are made automatically upon completion of the repair, according to all specified criteria.

For a more detailed example of how a smart contract works in the real world, let's look at another example.

Teresa and David decide to buy a house. Once a seller has been found, a contract is signed for the property's sale. They decide to create a smart contract rather than hire a real estate agent and a lawyer. It will contain information regarding the sale, including the price, terms, and conditions of the transaction. Teresa and David deposit money in cryptocurrencies on the blockchain ledger when the contract is created. The contract automatically verifies that the seller has transferred ownership to them, and the money is transferred to them.

Key benefits offered by smart contracts

They have many advantages over traditional contracts. Let's look at the most obvious ones.

  • Risk management. As we said, a smart contract implies automatic execution. This reduces the risks associated with non-performance or improper performance of the contract.

  • Savings. By utilizing smart contracts, you can save a significant amount of time as well as money. It is possible to reduce legal fees and time spent negotiating with third parties by eliminating the need for intermediaries.

  • Transparency and security. It ensures transparency within the contract and reduces the likelihood of conflict when all parties are informed of its terms. Due to the use of cryptography, smart contracts are also protected against fraud and unauthorized access to data.

Instances of Smart Contract Applications

Examples of using smart contracts.jpg

The use of smart contracts is widespread in industries where it is necessary to reduce the number of intermediaries, eliminate the human factor, and accelerate routine transactions.

Crowdfunding. Any transfer of money, especially between strangers, is a process that requires trust and is subject to many risks. All crowdfunding is associated with investing in startup projects, but here I want to focus on the Initial Coin Offering. This is the initial release of a limited number of tokens by a project. Investors buy these tokens with the hope of making a profit by selling their coins at a higher price after the main supply begins. A startup receives initial investment for its project. Here, a smart contract allows you to eliminate the possibility of fraud on both sides and make transactions in a specific algorithm of sequential actions.

DeFi and DAO. A decentralized autonomous organization is a form of organization in which activities are coordinated without centralized control. Because DAOs operate offline, they use smart contracts. Unlike traditional companies, which suggest trusting people, DAOs suggest trusting code. Thus, smart contracts remove the human factor from the DAO product.

Decentralized finance is financial instruments in the form of blockchain-based services and applications. It is literally an alternative to the banking sector and the traditional technologies of the financial system. DeFi uses smart contracts to implement various services (loans, exchange services, insurance, etc.). Thanks to smart contracts, customers can use these services without intermediaries. The future of decentralized finance is being powered by smart contract platforms such as Ethereum and the Binance Smart Chain.

NFTs. In order to create an NFT, digital files need to be converted into crypto assets on the blockchain. A cryptocurrency asset is defined based on the characteristics of its underlying code when an NFT is created.

It is also possible to combat counterfeiting and plagiarism using the smart contracts that underpin NFTs. Blockchain-based contracts can determine when and where new tokens or NFTs are created automatically. Furthermore, smart contracts allow you to track copyrighted products and detect fake certificates. By the way, the use of NFT smart contracts is expanding beyond the art world to areas like gaming and sports memorabilia.

Metaverses. Virtual spaces are still under development, but they already exist at this time. Each metaverse is a separate digital world, and each metaverse has its own economy, currency, and forms of ownership. Smart contracts govern trade and exchange in the metaverse, just as they do in the real world. The purpose of these systems is to automate trades and transactions and to control the execution of these processes in accordance with predetermined rules.

Selecting a Company for the Development

It is a responsible decision to select a company to develop smart contracts. The importance of taking a careful approach cannot be overstated. When selecting the company, the following factors should be considered:

  • Experience and Qualifications. Probably the first thing that comes to mind when choosing a company is the cases they have implemented and the quality of those cases. Do not be lazy and look at the company's portfolio and read reviews about them. If you get a chance to meet the members of the team that will be working on your project, pay attention to their qualifications and skills.

  • Reputation and Reliability. Make sure that the company has sufficient resources to complete the tasks of your project. Do additional research on the company's reputation to ensure its reliability and financial stability.

  • Price and terms. Compare companies, their terms and project prices. Choose the one that offers the best value for your money.

These tips are not new, however it is important to consider not only your needs and requirements, but also the company's reputation, experience, and qualifications when choosing a company for the development or a smart contract developer. A smart contracts engineer is a skilled professional who specializes in developing and implementing smart contracts.

ilink offers high quality services for the development of smart contracts and smart contract audit. We respect your desire to have confidence in the team you hire for development, so we are ready to answer any of your questions.

We strive to provide our clients with the best quality services at affordable prices. The ilink team develops and optimizes smart contracts according to your requirements. We also provide auditing services for existing smart contracts. Our team uses modern development methodologies and proven quality control practices. This ensures the effectiveness of our solutions.

Comments (1)

By Clicking on the Button, I Agree to the Processing of Personal Data and the Terms of Use of the Platform.

Aug 30, 2023
It would be interesting to read more about copyright protection with blockchain. I have also heard that diplomas, certificates and even CVs can be entered into the blockchain. Is this already implemented or just talked about? I have never come across it.
Aug 30, 2023
It would be interesting to read more about copyright protection with blockchain. I have also heard that diplomas, certificates and even CVs can be entered into the blockchain. Is this already implemented or just talked about? I have never come across it.

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