Trade Digital Assets via Smart Contracts
Monday, 28 Feb 2022 00:00 am

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With the increasing use and trade of digitalized banking worldwide, a trusted and efficient way of forming business agreements is being sought for. Smart contracts have emerged as the best alternative to traditional arrangements that are somewhat hindered in this process.

What are smart contracts?

First proposed by cryptographer Nick Szabo in 1994, smart contracts are executed automatically after the terms and conditions established by the parties involved in the transaction are met. Besides self-execution, it can also verify, control, or document data relevant to the buyer and seller's agreement.

You can compare it to a vending machine; ordinarily, to buy a product, you'd have to pay the shopkeeper, and then he would fetch the item for you. Still, in using a vending machine, all you have to insert your coin, and it'll respond as per the set rules, thus leaving no room for error or personal modification.

They are built using distributed ledger technology called blockchain, which means that they can execute without a third party. Bitcoin, Ethereum, Ripple, and Tezos are amongst the best trading platforms that support smart contracts. Ethereum is known to be the first blockchain platform to introduce smart working agreements.

Smart contracts are used for various circumstances like crowdfunding events, banking and credit services, logistics processes, digital trading assets, insurance premiums, transferring data, breach contracts, real estate, and even during the voting process.

How smart contracts function?

Smart contracts are computer codes that run on decentralized networks such as blockchain. The code is the agreement between the parties involved. It's similar to a computer performing  ‘if then' or a conditional type of programming. Suppose parties have decided that the transaction will be completed when such and such parameters are met. In that case, the code will be executed when they initiate the transaction with fulfilled requirements. In layman's terms, if 'a' is initiated, then execute  'b.'

Trading digital assets

Any form of digital assets can be traded via blockchain technology; what smart contracts do make the process automated. To give access to the smart contracts to your goods, you'll need a subject of the deal limited only within the elegant contract environment. After that's been done, private keys, i.e., digital signatures of people involved in the transaction, are required to initiate the contract. All you have to do is specify the terms and conditions of your agreement, laying out the precise series of operations that unfold when the contract executes and implements a coding language compatible with the smart contracts blockchain.

Suppose you have to purchase asset A from a person and pay them in a crypto asset. The payment will be held in the smart contract in the form of a receipt. The seller will send you a digital entry key, which will be the key to asset A by a specified date. If the key arrives before the said date, the contract will release both the money to the seller and the access to you, thus completing the transaction. If you do not receive the key before the date, your money will be refunded back to you.

The data is recorded in a shared database run by many nodes, which means it does not belong to a single person or company; therefore, the code cannot be altered without all the participants being alerted about it.

Benefits of smart contracts

Smart contracts pose several perks when compared to traditional contracts. And with the advancement of technology and increasing use of digital assets, they'll keep improving in the future as well.

Transparency :

The data related to the agreement, including its terms and conditions, is shared and accessible to all the involved parties. Thus leaving no scope for altering a contract without their consent for personal benefit or due to manual error.

Speed :

While manually filling out forms results in inevitable errors and constant rechecking and reconciling, automated smart contracts reduce the time and effort consumed by this process to a fraction of it, smart contracts also eliminate the lengthy verification process, a byproduct of it being secure and swift cross border transactions that would traditionally seem hectic.

Savings :

Blockchain technology facilitating transactions gets rid of the series of middlemen (lawyers, witnesses, etc.) required at different stages of a transaction, reducing the overall cost of the execution process.

Accuracy :

Due to its automated processing and lack of human control, there are less prone to errors, which are common when people have to fill out many forms during a traditional contract.

Security :

Smart contracts use blockchain technology, which is the most advanced level of data encryption currently available. It is very difficult to hack because the shared ledger chain would be needed to modify to change any data.