Contracts have been around for centuries. In fact, the first mention of a contract was in The Laws by Plato where it is described as “an agreement”. Essentially, a contract is a binding agreement between two parties that certain conditions will be met. A great deal has changed over the centuries, not only in terminology but also in format. Contracts take a great deal of time and paperwork to create. They can be altered by one or both parties frequently, and sometimes without permission. The safeguarding of contracts has always been an issue. Protecting contracts meant having high-level security software installed along with access limited to only key people. However, there is a new type of contract that can take care of the security issue — a smart contract.
This type of contract is quickly gaining popularity in many fields, such as law and real estate. They are also used in cryptocurrency transactions. They utilize blockchain technology to ensure authenticity and provide storage. The concept of a smart contract has been around for some time. It was created by Nick Szabo in 1994. Smart contracts are open-source computer codes that self-execute when conditions are met. Transactions themselves are smart contracts, in which one party promises to send a certain amount of cryptocurrency to another party on a certain date. In order for a transaction to be processed and stored, it has to be verified. As one of the conditions, the verification step in which a miner goes through a mathematical process, enforces the transaction. With smart contracts, code enforces the execution.
Ethereum’s platform was built for creating smart contracts since developers can write their own programs (i.e. smart contracts). Smart contracts have many features, such as functioning as multi-signature accounts, managing agreements and providing storage of information. These contracts eliminate the chances of misinterpretation since all parties must agree to the terms before signing them. Once signed, a smart contract cannot be deleted or manipulated (like a transaction). It’s important, however, to note that the code for smart contracts is created by humans. Thus, human error is still possible.
Smart contracts will soon replace traditional contracts, saving people time and money. They are more trustworthy and transparent, in that both parties know exactly what they are agreeing to — like a cryptocurrency transaction. It will be interesting to see how many industries adopt smart contracts in the near future.