Exploring Smart Contracts: What, How, & Why?

To truly understand what smart contracts are, how they work, and why they were introduced in the first place, today, we will be jumping into just about everything you need to know surrounding smart contracts.

defining smart contracts

Smart contracts are a part of numerous blockchain networks and have enabled, as well as paved the way to, Decentralized Finance (DeFi).

Furthermore, these smart contracts are also a representation of some of the largest innovations within the crypto space and are utilized by developers in a wide range of use cases.

To truly understand what smart contracts are, how they work, and why they were introduced in the first place, today, we will be jumping into just about everything you need to know surrounding smart contracts. Let’s dive in.

A Deep Dive Into Smart Contracts

First, we will be exploring the “what” behind smart contracts, where we will discuss what they are.

Smart contracts are essentially programs that get stored on top of a blockchain, which only runs at points in time when conditions that have been predetermined occur.

What this essentially means is that they are the perfect solution when it comes to automating the execution of an agreement, for example, in a way through which all participants can be certain immediately about the specific outcome.

Best of all, all of this occurs without the involvement of a third party or an intermediary, which results in no time being lost.

Over the years, smart contracts have been leveraged at a level through which they have automated workflows and have triggered specific actions when conditions have been met.

The Functionality Surrounding Smart Contracts

To truly get a better level of understanding as to why smart contracts are being as utilized as they are within the crypto space today, we need to dive a bit deeper and see how they work on a fundamental level. This is the “how” section.

Specifically, smart contracts follow if or when and then statements, which get written through the utilization of a specific programming language on top of a blockchain network.

After the point in time when the code gets written, a network of computers responsible for the maintenance and security of the blockchain can then execute the actions at the point in time when the predetermined conditions, which were created at the point of coding of the smart contract, get met and then verified by the network.

When it comes to these actions can include the release of funds to appropriate parties, sending notifications, or even issuing tickets.

Additionally, the blockchain then gets updated when the transaction is completed on top of the blockchain. This essentially means that it gets permanently recorded on the blockchain and cannot be changed, and only two parties, which were originally given access and permission to the process, can view the underlying results.

As we move forward within the smart contract, what we need to understand is that there can be numerous stipulations that are needed to be satisfactory to participants so that the task can be completed.

As a means of establishing these terms, participants, in this case, would need to decide how transactions, as well as the data that is represented on the network, agree on the results which were coded and that govern the transactions. This means that they would essentially need to discover all of the possible exceptions, after which they can define the framework and resolve any dispute that might occur.

With all of this in mind, the smart contract is then programmed by the developer. Over the years, numerous templates, as well as standards, have been created as a means of simplifying the overall process of creating smart contracts as well.

The Creation of a Smart Contract

In order to best understand how all of this is tied together, let’s go over the typical smart contract creation cycle.

The first step involves business teams collaborating with developers as a means of defining specific criteria that need to be completed for the desired operation of the smart contract in response to specific events or occurrences. Some of the most notable examples here include payment authorization, shipment receipts, and so on.

There are also more complicated operations that can be executed, such as determining the value of a derivative financial instrument or releasing an insurance payment automatically within a given point in time.

With all of this in mind, developers can then use a platform that allows smart contract functionality to create as well as test the overall logic of the smart contract. At the point in time when the application is written, it then gets sent to a whole new team that manages the security aspect of it, where it undergoes numerous testing phases.

A majority of blockchain-based projects will leverage a smart contract security audit company that gives them insights into their code. If everything goes according to plan, the smart contract can then get deployed on top of the blockchain network it was created for and is then configured to review the updates of specific events from a blockchain oracle that can cryptographically provide a secure means of streaming the data source at the point in time of its deployment.

Once it gets all of the required data surrounding the events from one or multiple oracles, it can then execute.

The Numerous Benefits of Smart Contracts

Now that we have a much broader level of understanding as to how smart contracts work, we can actually dive into the “why” aspect of them. In other words, we will go over the main benefits that smart contracts offer and why they are so heavily utilized.

The key areas in which smart contracts have showcased the best results include their overall speed, efficiency as well as accuracy, alongside transparency, trust, security, and savings. Let’s dive into each one of these parts individually to truly see what smart contracts have in store for developers and end-users.

When the conditions that are predefined are met, the smart contract is immediately executed. What this essentially means is that due to the fact that the smart contracts are both digital, as well as automated, there’s no paperwork involved with processing, and there’s no time spent reviewing any errors which might occur when things get done manually.

Additionally, due to the fact that there isn’t any third party involved with the process and due to the fact that all of these records are encrypted and are only shared across the participants involved, there isn’t any requirement surrounding if the information has been altered in any way to benefit one party over the other.

Remember that these smart contracts exist on top of a blockchain network, which means that all of the blockchain transaction records get encrypted. This essentially makes them extremely difficult to compromise and hack. Due to the fact that the record is also connected to previous as well as subsequent records, on top of this distributed ledger, hackers will also need to essentially alter the entire chain in order to alter the transaction, which is nearly impossible to do unless they control 51% of all nodes on top of the network, something which is also extremely difficult if not impossible.

Another key benefit here which is a point of discussion, has to do with cost savings. Smart contracts can remove the requirement for any intermediaries to handle the transactions and their associated time delays, as well as overall fees.

Use-Cases of Smart Contracts

Smart contracts have seen usage in a wide range of industries. From cross-border payments to loans and mortgages, supply chain management, and insurance, the opportunities surrounding smart contracts are endless. You will find that most smart contracts see the highest level of utility within decentralized applications (dApps) that facilitate processes related to Decentralized Finance (DeFi).

As an example here, we will be going over how the United States Property Coin (USPC)  utilizes smart contracts.

USPC is a security token that utilizes the power of blockchain technology and has a value that is stored in a real estate portfolio. The project moves value from real-world sources, such as real estate, to a digital token in the form of USPC. USPC can make an otherwise illiquid asset a lot more liquid due to the fact that its value can be distributed to a lot more people. This project is being developed by the leading luxury real estate development and asset management firm, Primior.

USPC is backed by physical, income-producing real estate assets that are located throughout the United States’ urban markets. USPC operates by deploying smart contract technology to securitize a portfolio or properties, and then distribute that value to investors through a cryptocurrency. This means that the project will leverage the power of smart contracts to automate real estate transactions and create an immutable representation of real estate assets.

While fiat currencies and the stablecoins that are pegged to them can have negative effects due to inflation, USPC can benefit from the cash flow income, alongside long-term capital appreciation from the commercial real estate market within the United States, and by leveraging blockchain technology, as well as smart contracts, it can enable frequent and periodic dividend accrual.

Remember that USPC is a cryptocurrency, so it can be transferred to anyone in a peer-to-peer (P2P) way without involving any intermediary. The token can also function as a fractional ownership in the corporation, which holds the underlying assets.

As such, the Real Estate industry represents a solid use-case surrounding cryptocurrencies as well as smart contracts, as land deeds can be difficult to phrase when one accounts for the tax liens, mortgage liens, as well as other encumbrances, mineral weights, and fractional ownership by limited partners. Smart contracts can automate all of this and record all of it on top of a blockchain, where it can always be verified and traced.

The Future with Smart Contracts

We have gone over everything you need to know surrounding smart contracts, from what they are to how they work and why they are being used so regularly.

With the development within the blockchain space and the growth in terms of popularity, value as well as utility surrounding smart contracts, the underlying innovation of blockchain has become a compelling use case for companies, especially within industries such as real estate.

It is likely that we will see smart contract usage spike throughout the following years as blockchain technology becomes even cheaper to implement and a lot more people get comfortable with using cryptocurrencies.

We also went over how smart contracts are being used within the real estate industry and how far their potential usage can be enhanced and pushed forward with their improved utilization and utility. Moving forward, it is likely that many other industries will be pushed in the future by blockchain and smart contract technology, so understanding how all of it works and is tied together plays an essential role in the outcome of this future. USPC is just one of many projects that leverages smart contracts to increase its utility, but it represents a solid example of what we can expect in the future as well.

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