Decentralization is the process of distributing and dispersing power away from a central authority. Most financial and governmental systems, which are currently in existence, are centralized, meaning that there is a single highest authority in charge of managing them, such as a central bank or state apparatus. There are several crucial disadvantages to this approach, stemming from the fact that any central authority also plays the role of a single point of failure in the system: any malfunction at the top of the hierarchy, whether unintentional or deliberate, inevitably has a negative effect on the entire system. Bitcoin was designed as a decentralized alternative to government money and therefore doesn’t have any single point of failure, making it more resilient, efficient and democratic. Its underlying technology, the Blockchain, is what allows for this decentralization, as it offers every single user an opportunity to become one of the network’s many payment processors. Since Bitcoin’s appearance, many other cryptocurrencies, or altcoins, have appeared, and most of the times they also use the Blockchain in order to achieve some degree of decentralization.
A smart contract is a protocol that enforces the performance of a contract with adding the terms of the agreement into the code. Smart contracts are a great way to exclude any third party from the transaction and make transaction prices lower, as they need no validation.
Smart contracts are implemented in a lot of cryptocurrencies to control the transfers of digital currency, establish a governance and a lot of other things. But smart contracts have a wider range of possible implementations. Smart contracts may be used in voting, management, machine-to-machine interactions in the internet-of-things, real estate and in the building of personal data storage with specific access policies, e.g., medical databases.
Still, smart contracts are not perfect. They don’t exclude the possibility of bugs or fraud and have no way of changing post-factum, which may be necessary in some cases. The Smart Contract Process
Pre-defining the contract.Here the terms of engagement are established by all counterparties, e.g. currency to be used to make payments, the currency rates, and variable interest rate.The conditions for execution are also set; for example the time, date and even the variable interest rate at a given value.
Events — here events trigger the implementation of the contract.
The events can refer to; the information received and initiation of the transaction.
Execution and the transfer of value — here the terms of the contract will dictate the movement of value which is based on if the conditions have been met.
Settlement of the contact — this can happen in two ways;On-chain assets (digital)– in the case of virtual assets such as cryptocurrency, the accounts are automatically settled.Off-chain assets (physical) — for assets like stocks and fiat, the changes to accounts on the ledger will match the off-chain settlement instructions.
Benefits Of Smart Contracts
Smart contracts allow for the terms and conditions of these contracts to be fully accessible and visible to all the relevant parties. Once the agreement has been established, there is no way to dispute it.
One of the main requirements of smart contracts is the need to record all the terms and conditions in precise details. The element is necessary since an omission can result in transaction errors. So, automated contracts try to avoid the pitfalls that are associated with manually filling out heaps of forms.
Smart contracts employ the highest level of data encryption that is currently available, the same as what is used by cryptocurrencies. By doing this, their level of protection is among the best and the most secure on the world wide web.
Smart contracts live on the internet and run on software code. As a result, they can execute transactions very fast. This speed can save many hours when compared to traditional business processes.
This is the byproduct of accuracy and speed. The great thing is that higher efficiencies lead to more value-generating transactions that are processed per unit of time.
6. Clear Communication
When setting up smart contracts, there is a need to detail everything accurately. This means there is no room for miscommunication or misinterpretation. Therefore, they can cut down on efficiency that is lost to gaps in communication.
7. Storage and Backup
Smart contracts are used to record vital details of each transaction. Therefore, wherever an individual’s details are used in a contract, they are permanently stored for future reference. So, in case there is data loss then these attributes can be easily retrieved.
The good thing about smart contacts is that they inspire absolute confidence in their execution. The secure, autonomous and transparent nature of these agreements takes away the possibility of bias, manipulation or error.
9. Guaranteed Outcomes
This is another attractive feature of automated contracts. They have the potential to significantly reduce or even eliminate the need for litigation and going to courts. By employing self-executing contracts, these parties commit themselves to operate by the rules of the underlying code.
One of the primary benefits of a smart contract is that they eliminate the need for having a vast chain of middlemen. This means there is no need for lawyers, banks, witnesses and any other intermediaries.
Smart contracts have the potential to disrupt many industries including the banking sector, insurance, telecommunication, art world, music and film, education and many more. They range from simple to complex.
An example of simple contracts includes time-stamping services like ascribe for art registry — also, governmental and semi-governmental records for land titles, birth certificates, school, and university degrees.
However, many regulatory aspects are made up of complex contracts. A good example is the Decentralized Autonomous Organization which represents the most complex form of smart contracts.
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