Smart contract is an electronic protocol, written with the use of computer code. Its purpose is the transfer of information and enforcement of contract terms by both parties. In 2013, smart contracts began to realize in practice thanks to the creation of the Ethereum project.
Smart contracts are used for various purposes: issuing their own cryptocurrency and attracting investments for ICO (Initial Coin Offering), secure storage of data, the Internet of things (IoT) and for concluding reliable contracts even at a remote distance.
Features of smart contracts
Smart contracts ensure the security of the transaction and are free from risk of mixed understanding of terms of the transaction, because they are based on cryptography. Smart contract transactions are more profitable, because a person does not need to pay lawyers, intermediaries or sue if the contract is not fulfilled. Also, the fulfillment of the terms of the transaction is automatic and with minimal costs for their maintenance, without the involvement of intermediaries.
How do smart contracts work?
Smart contracts are based on blockchain technology. It is a distributed registry, which is a decentralized system that exists because of the many computers that are integrated into one network. Blockchain allows users to carry out transactions, transfer information and material value without banks and intermediaries.
The smart contract code is executed when the transaction is executed. You can do this from your account by sending a transaction.
Smart contracts only respond to transactions. The founder of Ethereum explains the work of smart contracts as follows: the asset or currency is transferred to the program, after that, it begins to monitor the fulfillment of the terms of the contract. As soon as the will fulfilled, the seller receives money and the buyer receives goods.
At the moment, most smart contracts are written on the Ethereum platform.
Smart contracts and Initial Coin Offering
Let’s assume that a group of people have a business idea and need money for its implementation. To do this, they organize the ICO and offer to invest money in their project. Instead they give tokens – the currency of their project. It is more profitable to but tokens at the very beginning of the ICO. Also it is often give a bonus for large investments.
Almost all ICOs are conducted by using smart contracts. The advantages of conducting an ICO on a smart contract are obvious to the investor.
Benefits of smart contracts
- Saving money and time, as it is no longer necessary to use the services of intermediaries for conclusion contracts or transactions;
- Security is provided since the prescribed terms of the contract are stored in a distributed registry, and no one can change them;
- The absence of intermediaries allows contract participants to work on more favorable terms and save their money on lawyers, notaries, auditors and intermediaries;
- Provide a speedy resolution of issues. As soon as conditions will fulfilled, the parties immediately exchange assets.
Smart contracts will be distributed around the world in various spheres of life as they save money, time and also give an opportunity to work with any companies in all countries of the world.