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Smart contracts: what are they?

Beatrice Borghi - July 12, 2022
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Smart contracts: what are they?

Smart contracts - PXR Italy

Smart contracts are computer protocols based on blockchain technology that define rules and penalties of an agreement in the same way as a traditional legal contract. The innovative use of these tools lies in the automation of the process of executing an agreement, which does not require third parties involved to control the security of the system.

Therefore, we define smart contracts as self-executing contracts, in terms of agreements formulated between buyer and seller. The codes contained in smart contracts, which exist on the decentralised blockchain network, control that the execution of transitions is correct and secure. Moreover, they are traceable and irreversible, thus giving this software little or no margin for error.

Nick Szabo was the first to theorise the concept of smart contracts, in 1994. During his studies, he realised that the decentralised ledger using blockchain would be useful for creating 'smart contracts' and so he set to work structuring this new technology.

How they work

Smart contracts work by following simple statements (such as 'if/when…then…') that are written in code on a blockchain. Then, only when the predetermined conditions are all verified and fulfilled, a network of computers goes and executes the transaction actions.

When the transaction has been completed, the blockchain is updated: only and only authorised parties will be able to see it, and it cannot be changed from here on. Within the smart contracts we find all the necessary clauses to satisfy its participants; these will establish the terms of service and create an agreement between the parties to determine the rules of the transitions.

Smart contracts: the key features

The three best words to define an intelligent contract are: precision, speed and efficiency.

Indeed, smart contracts are executed immediately the moment a condition is approved. Furthermore, the fact that these contracts are digital and automated completely eliminates the paperwork of traditional contracts, including the possible errors that occur when documentation is filled out by hand.

Let's take a closer look at the advantages for those using smart contracts:

  • Trust and transparency: information cannot be tampered with and there is no third party involved: encrypted transaction logs are only exchanged between authorised participants;
  • Security: blockchain transaction records are encrypted, and therefore extremely difficult to hack. Each entry on the distributed ledger is linked to previous and subsequent entries: this does not allow hackers to get to individual records and tamper with them;
  • Savings: smart contracts eliminate the need for intermediaries in the control of transactions, and with them all the associated costs (taxes, salaries).

In conclusions

Accordingly, smart contracts have enormous potential.

It is important to emphasise that it is difficult for a large company to easily and optimally manage bureaucracy and all that is involved in this process: smart contracts, in this respect, represent unprecedented possibilities. Sometimes the old and the new converge, giving rise to innovations with very high potential.

The real question is: is the world open to accepting these smart contract technologies or will it continue to use the traditional?

If you are interested in the global technology landscape, read our Report FinTech & Defi.

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