Smart Contracts: What are they, how do they work and what are they for?

From the food sector to the healthcare sector, smart contracts can have many uses. Find out what they are and how they work in this article.

smart contracts
Communication Team

Telefónica

Reading time: 4 min

What is a smart contract?

To explain what a smart contract is, we could start, although it may seem obvious, by recalling the RAE definition of a contract: “Pact or agreement, oral or written, between parties who are bound by a specific matter or thing, and to whose fulfilment they can be compelled”.

Or, in other words, the rules of the game on which a relationship between two or more parties is based and how they will interact.

Verbal or written contracts can be subject to interpretation, which creates a difference with respect to smart contracts, which are capable of executing and enforcing themselves.

Smart contracts are computer codes with programming languages, which means that the terms of the contract are sentences and commands in the code that form them.

They are based on blockchain technology and can change the traditional way of doing business because of the aforementioned ability to make them run autonomously.

The term smart contract was first used by Nick Szabo in 1996 in his article ‘Smart Contracts: Building Blocks for Digital Markets’.

How do smart contracts work?

As we have just mentioned, the security of transactions is guaranteed by blockchain technology. As such, they allow them to operate automatically and autonomously.

It is therefore not necessary for the supervisory body to issue a verification. It is sufficient to indicate in a computer program which result is to be executed.

For these contracts to work properly, it is necessary that each and every party involved knows (and accepts) what rules and steps are in place. Once the execution has started, the programmed rules cannot be changed.

What smart contracts are for

Because of their link to blockchain¸ technology, the value of smart contracts is the security, trust and transparency that they provide between the signing parties, avoiding alterations of any kind (whether misunderstandings or forgeries) and eliminating intermediaries.

Examples of blockchain and smart contracts

To understand more tangibly what they are, let’s look at some examples of blockchain and smart contracts:

  • Insurance. Thanks to automation, doubts about the assumptions included in the policies can be eliminated: they allow the amounts to be paid automatically.
  • Food traceability. The blockchain and smart contracts provide a great deal of information about the food, its handling process and transport. Thus, customers have more knowledge to decide whether to buy one product or another.
  • Real estate market. Real estate registration will be more efficient thanks to smart contracts.
  • The registration of real estate will be more efficient thanks to smart contracts, avoiding manual paperwork and possible incorrect procedures.
  • Patents. Smart contracts are useful both for creating patents and for detecting hypothetical infringements.
  • Healthcare sector. In the healthcare sector there can be different uses. On the one hand, it can increase security in the storage of medical records. On the other hand, as with food, data such as the cold chain, the health passport or even clinical research can be known.

Advantages of blockchain and smart contracts

Smart contracts and blockchain have a number of advantages:

  • Savings in time and materials. As there is no need for intermediaries (or commissions), there is a reduction in costs. Likewise, as everything is digital, there is also a saving in paper. There is also a saving in fuel (and therefore a reduction in pollution) by reducing travel.
  • Reliability. It cannot be altered or falsified, and the chances of errors in both the terms and the subsequent processing are minimised.
  • Automation. As it is executed automatically, the speed of the processes is increased, thus simplifying the procedures by simplifying and automating the stages.
  • Security and autonomy. Due to the aforementioned automation, the risk of a third party being involved in the implementation of these mechanisms is eliminated.
  • Productivity. By making tasks more efficient, employees do not spend time on tasks that may be more tedious or repetitive, so in addition to productivity, employee satisfaction also increases.
  • Improved customer experience. By allowing customers to sign up more easily and quickly, their experience is improved. In addition, the purchasing process is modernised.

Conclusion

The main advantage of a smart contract is that it can execute and enforce itself through a set of programmed parameters. In addition, it executes autonomously and automatically.

Along with the other benefits we have discussed throughout the article, smart contracts can be applied in numerous practical examples of various kinds, avoiding errors or disruptions, regardless of whether they are voluntary or not.


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