Imagine being able to buy and sell houses hassle-free, without middlemen and without any fees from middlemen or registration fees.
This is how smart contracts work. A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control, or document legally relevant events and actions according to the terms of a contract or an agreement.
Now to understand the smart contracts in a much simpler way, let us assume that you need to sell a house. Using the traditional method, there are a few things to consider. You need to find someone who is willing to buy your house. To buy or sell your house, the involvement of a trusted third party is essential. A trusted third party verifies the deal, ensures all conditions of the contract are met in order to transfer the ownership of the house. This process is quite lengthy along with middlemen's fees which differ from country to country.
Now imagine the deal using a smart contract: Suppose you want to sell your house at a price of 100 ETH. You must place your house in a smart contract and a token represents the ownership of your house. Now whoever pays you 100 ETH, the token is sent to them. If the amount paid is not correct then the ETH is sent back and the house stays in the smart contract.
Some advantages of Smart contracts:
- Encrypted
All smart contracts are encrypted, and cryptography prevents unauthorized access to them.
- Speed
Smart contracts automate many business processes using computer protocols, saving hours of time.
- Accuracy
No errors as it avoids filling manual forms, registration papers, etc.
- Backup
A blockchain contains copies of all documents, which makes it easier in case of a data loss to restore originals.
However, there are some disadvantages as well, such as the following:
- Hazy terms
In the event of unclear terms and conditions in contracts, smart contracts may not always be able to handle them.
- Inability to modify contracts
Changes to smart contract processes are nearly impossible; correcting errors in the code may be time-consuming and expensive.
There may be some disadvantages but so far smart contracts carry the action faster, cheaper, and secure.