TopIntroduction To Smart Contracts
In everyday life of humans, contracts are valuable mechanisms to uphold the promises between known or unknown individuals in a fair manner. By definition, a contract is a voluntary agreement between two or more parties creating certain obligations enforceable by law. Contracts are generally enforced to ensure smooth interaction with all the stake holders over the participating scenario without any problems and minimal need of trust. The beauty of a contract is that you have a remedy when people break their promises. By incorporating the power of physical contracts into the computing world, we could create wonders in the way we do businesses with clearly outlined contractual terms and solve disputes, if any, amicably. With all the noteworthy properties of blockchain network, it turns out that blockchain seems to be the perfect platform for deploying the digital contracts to run digital businesses than making physical contracts to run digital businesses. This thought gave rise to the invention of smart contracts, the programmable digital contracts written and deployed using any turing complete language over the blockchain network (Buterin, 2014).
Smart Contracts are self-executing programs which run on the blockchain and are capable of enforcing rules, consequences and computation over every transaction happening in the blockchain. The concept of smart contracts was first formally coined by Nick Szabo in 1994. Smart contracts can take any form of data as input; perform computations over the input based on the protocols specified in the smart contract and can enforce decisions based on the prevailing conditions for producing the output (Szabo, 1997). This revolutionary concept automates the enforcement of contractual promises without any intermediaries or trusted-third parties and improves transparency as every individual node in the blockchain abides the protocols specified in the smart contract. All the contract transactions are stored in blockchain in a chronological order for future access along with the complete audit trail of events. Also the participating nodes cannot tamper or change the contract agreements stored in the blockchain thus removing the chances of attack. Smart contracts make the entire network behave like a large central computer, but avoid the risk of failures, cost and trust of a centralized computing mechanism.
Like any regular legal contract or agreement, smart contract can incorporate every possible consequence of transaction behavior and can issue the actions to be taken for each scenario. Smart contracts makes it possible to deal with all the valid and invalid transactions that can happen over a blockchain and even trace out abnormal actions from participating nodes. The smart contracts does not store any data, instead they provide a guideline on how the data are stored in blockchain. Rather, they have the potential to reduce and even eliminate the chances of fraud and overhead costs of many commercial transactions.
Consider a simple example of supply chain which is currently controlled by the intermediaries mostly through a centralized platform. We have chosen this sample scenario since the supply chain is a major business scenario where middlemen play a major role in controlling the activities right from the production to distribution. Many unlawful activities like hoarding, black marketing etc. happens in the supply chains to multiply the profits of middleman and the producers and customers suffer a lot. Before unveiling the blockchain platform, it was practically impossible to administer and govern the individual activities over the Internet without the help of a centralized governing organization which ensures that the data is not getting tampered or fudged by any attacker. Due to lack of a stable decentralized platform the independent individuals could not confirm that a transaction had successfully being performed without relying on a trusted central body to verify that this particular transaction was genuine.
The middleman, who plays an economic role intermediate in the society in controlling the business between producers and consumers for decades, will get eliminated by the potential of smart contract powered blockchains. Moreover, it provides liberty for people to perform transactions of digital assets or data across the blockchain network, in a secure, trust-free, and immutable way. It could do wonders in the supply chain by enabling a legal set of protocols for every transactions happening in the supply chain. Moreover, the public ledger system may enhance visibility and thus fair distribution and pricing to products with lesser wastages.
Figure 1.
How smart contracts eliminate middleman in supply chain