What is a smart contract?

What is a smart contract?

Smart contracts is the next step in the development of the blockchain idea. They expand the initial notion of a blockchain as a protocol for recording a financial transaction and transform it, in its essence, into a universal utility. Smart contracts by themselves are not the actual legal contracts. They serve as a digital solution, a programming support, for recording and safeguarding a legal transaction. Smart contracts not only allow us to maintain a secure and unalterable ledger of financial records, they alsto provide for automatic monitoring in the implementation of any legal agreement. The verification mechanism for the way in which contractual obligations are consecutively met by all parties is based on the consensus reached during their initial agreement. Smart contracts are carried out by computer networks that follow the protocols established by the participants of a particular legal transaction in the process of making their contract. The blockchain public ledger records all steps in the implementation of their contract in the form of secure and untamperable records for the resulting transactions. This way the smart contract technology offers us a powerful tool for setting up mutually beneficial legal contracts whose automatic implementation carries a significantly diminished risk of errors or manipulations by all sides and, therefore, instill a greater sense of mutual trust in all parties, involved in the transaction.  

Currently, the CEOs of some major companies in the world are discussing the application of smart contract technologies to their businesses. The range of possibilities is endless: it varies from the new opportunities in financing and lending to the utilization of smart contracts for transfer price formation between subsidiary companies. Much of what is at the table now was before impossible to imagine and to create because, in the past, the contractual partners used separate and often incompatible databases for their operations. But with the new decentralized database that utilizes blockchain technology, smart contracts are implemented automatically and instantaneously provide the implementation information to all sides, thus, eliminating the need for a third party verification. 

The important question: when would utilizing smart contracts in place of the already existing technologies be more advantageous to us? It is no doubt that blockchain technologies offer a more reliable solution in a situation where transactions between contractual partners require the existence of a single source of truth that guarantees a faithful implementation of contractual obligations and prevents delays and errors from happening (which is often the case with today's traditional technologies). 

We at Bit-Labs work closely with our clients in order to assess their needs and to offer them innovative and practical solutions to improve the day to day management and running of their businesses, organizations or institutions, utilizing the unique advantages and benefits presented by smart contracts today. For more information, please contact us.