Smart contracts are contracts whose transactions run without manual activities and thus save costs and time to a considerable extent. Translated into German, smart contracts mean ‘intelligent contracts’, which can be traced back to digital contracts based on blockchain technology. Smart contracts check whether the terms of the contract are fulfilled and thus automate many activities. These can be classified as self-fulfilling contracts that no longer require human supervision. Here, there is the possibility of concluding a written agreement without the involvement of a notary. A practical example is car sharing, where the money is transferred and the car is registered via smartphone. This means that rights management is also automated here.
Example of smart contracts
Smart contracts are contracts between different parties in which transactions are executed automatically without human assistance. In smart contracts, a program checks whether or not the contract conditions are met and triggers a programmed instruction. Smart contracts model contracts as computer protocols or monitor their execution with technical support. A written form of the contract, whether on paper or as a file, is therefore unnecessary. A good example of a smart contract is a vending machine. The programming in the machine registers that a coin has been inserted (the first condition for the contract) and initiates the dispensing of the goods (the second condition for the contract). If no drink comes out – for example because nothing was selected or there is no more of what was selected – the machine returns the money. One condition of the smart contract was not met, and the contract was canceled.
But what if neither the beverage or the money that was inserted come out? No one is likely to involve a lawyer for two Euros for a soft drink. Things are different when it comes to a loss of two million Euros. This is where the blockchain code comes into play.
The blockchain is a distributed database. Distributed databases have been used for years, for example when a bank distributes its data across a variety of server centers. However, to date distributed databases have always had a central institution which is responsible for the data and administrates it: the bank itself. If the bank drops out as the central administrator of the data, all the data are gone. On the other hand, in the blockchain the responsibility for the data is not only decentrally organized, it is also distributed across very many equal actors at the same time – a peer-to-peer network. The more actors, the more secure and more reliable is the transaction.
The Evolution of Databases: Central – Decentralized – Distributed
The transactions of contents, information or documents are encrypted in blocks, linked together in the blockchain and can no longer be altered at a later time. All the data and documents stored in the blockchain have a unique hash value and only the smallest change – even if it’s only a pixel being colored – changes that hash value. That way, every process can always be tracked, up to 100 percent, making it impossible to manipulate a smart contract in the blockchain.