For thousands of years now, people have been shaking hands to confirm an agreement. If an arrangement becomes more extensive or specific, written contracts are drawn up and signed at the end. Is that still the best way of doing things in the 21st century, though? Not necessarily. Analogue contracts have to be archived, and these archives must in turn be maintained. With traditional contracts, moreover, there is also often a certain scope for interpretation that smart contracts lack due to the “code is law” principle, which allows the contracts to be executed entirely automatically and leads to more efficient processing. In the context of the digitalisation of our society, smart contracts are an answer to the above problems that is becoming increasingly the norm.
Smart contracts are agreements which are stored in a programming code. The mutual rights and obligations under the contract can be presented in the digital code in such a way that, once it has been concluded, execution has little or no need for intermediaries. Say, for example, a customer orders a product on the internet and clicks to confirm the purchase contract. Payment is only made at the end, however, and is done entirely automatically. As soon as the goods have been delivered by the forwarder, the code triggers approval of the payment to the vendor. It's a secure transaction for both parties, then. These do not necessarily have to be humans, though: fully automatic order processes can also be performed between machines in a production system – think “internet of things”. Ultimately, a smart contract is based on the simple if-then function: in other words, only when a certain condition has been met does a previously defined action occur automatically.
Speed, security and automation are central benefits of smart contracts. These are in turn made possible by distributed ledger technology (DLT), through which all transactions are organised decentrally. Everyone can see the data, but no one can modify them. This means that the participants can ascertain at any time what agreements have been reached without having to go through a third party. Smart contracts exert a particular charm in the monetary sector, which is currently moving in the direction of decentralised finance (DeFi). Whether taking out loans, trading securities or managing assets, the possibilities are enormous. Even the sale of real estate by means of a smart contract protocol is feasible. The goal of smart contract technology is to automate the execution of contracts, preferably without any human intervention at all. Not only does the technology allow time and money to be saved, but the data records are stored on the blockchain in such a way that they are protected from manipulation.
While smart contracts are turning the analogue world on its head at the moment, the evolution of the contracts written in code is already entering the next stage. All the talk is of hybrid smart contracts, which enable digital legal contracts to be taken into a new dimension through access to off-chain data. These data (e.g. share prices, base rates, weather data, etc.), which cannot be stored directly on the blockchain, are made available to the smart contract through what is known as an oracle network. The oracle network serves, then, as a sort of external database which the blockchains can access when required in order to obtain data. Thus, for instance, a smart contract-based weather insurance policy could pay out its benefit automatically on the basis of on real events, such as a flood. In practice, the chaining of forgery-proof data from sources outside the blockchain is handled by the Chainlink crypto project, among others. Other crypto assets are also trying to exploit the dominant position of Chainlink for themselves. Last autumn, for instance, Cardano entered into a partnership with Chainlink in order to integrate the latter’s oracle solution for real-time market data into its own smart contracts.
Source: DappRadar
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