Your friendly neighborhood slacker. Chill Clinton likes to write about film, music, collectibles, and more.
What are Smart Contracts?
If you have a basic understanding of the purpose and function of blockchain technologies, you may find yourself encountering the term smart contracts frequently. With the Cardano network rolling out tests for its smart contract functionality on September 1st, leading to the network's ADA token reaching its all-time highest valuation, many are looking into smart contracts for the first time.
Simply put, smart contracts are decentralized applications that exist on a blockchain network, and execute a function when the terms of a contract are met.
As of this article's writing, the Ethereum network offers the only stable smart contract support to the market. However, smart contract technology can be supported by many decentralized networks, and we will soon see greater competition in the space as Cardano continues to refine its smart contract technology for stable release.
Although their name would lead you to believe otherwise, smart contract functionality does not necessarily reflect an agreement made between two parties. Instead, it's simply an acknowledgement that a particular function will automatically occur if particular conditions are met.
Let's check out some simple examples. We'll imagine that you are a blockchain developer and you want to save a bit more money throughout the month. You could develop a smart contract that automatically pays out the contents of your "savings wallet" to your primary wallet monthly. Or you could go even further and require the savings wallet to receive daily contributions, or the smart contract will withdraw its contents and send them to a charity (many more accept cryptocurrency than you would think)!
How Smart Contracts Receive Real World Data
There are, however, some limitations when it comes to using smart contracts. Since these applications exist on the blockchain, they can only interpret data that also exists on the blockchain. Because of this, smart contracts alone cannot execute on terms that require real-time data, such as weather conditions, movements in stock prices, or the outcome of a basketball game.
Because of this, smart contracts significantly benefit from the use of oracles, or software that feeds data requested by a smart contract from the web to the blockchain. Just one app may request the same data from thousands of oracles to ensure that the reported data is accurate and trustworthy.
Presently, the most prominent oracle network for supplying smart contracts built on the Ethereum network is Chainlink. Chainlink provides a network for securely transferring information between smart contracts and oracles and issues an ERC20-extension token called $LINK, which is used to compensate node operators in exchange for verifying transactions, and can also be used like other cryptocurrencies to make purchases, or store and transfer capital.
Why Use Smart Contracts and Oracles?
Let's imagine that you are a manufacturer working with a freight company that ships thousands of pallets using dozens of barges.
In the past, you may have paid upfront for those freight services, which makes sense, since the shipping company would shoulder a significant liability by rendering service before being paid.
While traditional contracts would provide legal recourse for freight companies to collect on unpaid invoices, this process isn't without significant overhead, time, and hassle.
But let's also consider your concerns as a recipient. What recourse do you have if shipments arrive significantly late- leading to production issues or receiving spoiled items?
If your money is already gone, you are likely at the mercy of the shipping company, and while you would also likely have legal recourse, it may not be worth the cost and inconvenience.
This is where a smart contract using oracles could help tremendously. For example, you as a manufacturer could render payment to the smart contract, which will hold the money and issue it to the freight company as long as the conditions of the contract are met.
Though these contracts can be far more sophisticated, let's imagine its terms only require that a shipment be received before issuing payment, and perhaps pays out incrementally smaller amounts depending on how late the shipment arrives.
When the shipment is received by the port, its arrival time will be recorded and reported by oracles, with access to the port's ledger data, to the smart contract, which will automatically release payment to the freight company in accordance with the agreement.
This is mutually beneficial, since the contract promises payment to the freight company, ensuring that they will not need to pursue payment after rendering services, and it also protects you from being required to seek compensation when there is recorded evidence that the terms of the contract were not met.
Additionally, as decentralized applications, these contracts offer complete transparency, immutability, security, and faster, often less expensive payments than those facilitated by financial institutions.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2021 Chill Clinton