Smart contracts and their applications in blockchain technology

Blockchain technology is transforming industries across the globe, and one of its most powerful innovations is the smart contract. So, what is a smart contract? Well, smart contracts are at the core of decentralised systems, offering a new way to automate transactions, enhance and build trust, and eliminate the need for traditional intermediaries, such as banks and lawyers.

In this article, we'll further explore the question “what are smart contracts?”, explain how they work, their real-world applications, and how BTC Markets supports the cryptocurrencies that make this innovation possible.

What are smart contracts?

Smart contracts are like digital agreements that run automatically. Once the conditions of an agreement are met, like a payment being made for a property sale or a deadline passing, the contract takes care of everything else automatically. They’re built to run on blockchain networks such as Ethereum, which makes them secure and tamper-proof. These are self-executing contracts where the terms of the agreement are written directly into computer code.

In the early releases of Ethereum’s smart contracts in 2014, many began touting the line “code is law”. While this may sound sleek, in practice, smart contracts still depend on human intent and legal recognition. There have been multiple practical applications, but the largest use case is the ability to program money or anything of value in a trustless way, without the need for a middleman.

At BTC Markets, we support a range of cryptocurrencies like Ethereum that rely on smart contract technology to power a vast ecosystem of decentralised applications.

How do smart contracts work?

So, how do smart contracts work? Well, smart contracts operate by following simple "if… and then..." statements written into computer code. If a specified condition is met, then the contract automatically executes the corresponding actions.

For example, if an Aussie company shipped cotton to its Chinese buyer, a smart contract could automatically release part-payment from the Chinese buyer once the container ship carrying the cotton has crossed into Chinese waters. In practical terms, the trigger for crossing into Chinese waters would be via a GPS-enabled device attached to the container that is able to pick up the ship’s location. The smart contract would then release payment once the appropriate longitude and latitude coordinates were crossed. The GPS would send the data received from the GPS device that matched the terms detailed in the smart contract. No human intervention is needed beyond creating the initial contract.

Benefits of smart contracts

Smart contracts offer several compelling advantages over traditional contract processes:

• Eliminate intermediaries: Transactions occur directly between parties, reducing and even removing the need for brokers, lawyers, or banks.
• Reduce costs: Without intermediaries, transaction fees and administrative costs are significantly reduced. Many banks are already actively exploring smart contracts as part of their plans to automate international trade transactions, many of which still use paper-based systems.
• Increase transparency: Contract terms and transactions are recorded on a public ledger, making the process auditable and trustworthy. For transactions that require increased privacy, private networks are often developed.
• Enhance speed and efficiency: Automated execution saves time compared to manual processing.

BTC Markets enables users to trade leading cryptocurrencies such as Ethereum that leverage smart contracts, making it easier to participate in the evolving decentralised economy.

Real-world applications of smart contracts

A wide range of industries are now using smart contracts:

1. Decentralised Finance (DeFi)

Some of the first practical use cases of smart contracts were based around borrowing against Bitcoin. On various DeFi platforms, you can deposit crypto assets as collateral, and a smart contract automatically lets you borrow against this collateral, typically 40%-50% of the value of your deposit. The smart contracts automate the borrowing and lending processes:

• If the value of your collateral falls below a certain trigger point, the smart contract can automatically liquidate part, or all of the Bitcoin used as collateral to protect the lender.
• If you repay your loan, the smart contract instantly releases your collateral. No paperwork, no approvals, no delay.

The innovation: Computer code replaces the credit teams, enforcing the loan terms without human intervention.

2. Real Estate Transactions

When you buy a property, it usually involves agents, banks, and lawyers. A smart contract can streamline this entire process:

• Once the buyer transfers funds into the smart contract, and ownership documents are uploaded and verified, the smart contract automates the transfer of ownership rights and releases the payment to the seller.
• This creates a near-instantaneous, secure, and paperless property transfer.

The innovation: The smart contract acts like a digital escrow facility and a legal executor, automating the process that can take traditional professionals weeks to complete.

3. Parametric Insurance - The Future

In Australia, we have seen our fair share of droughts. Imagine a farmer taking out insurance for crop damage caused by drought. Instead of filing in a claim and waiting weeks for assessment:

• The policy becomes a smart contract that pulls weather data from a trusted source, e.g. the Australian Bureau of Meteorology.
• If rainfall drops below a set level for 30 consecutive days, the smart contract triggers an automatic payout to the farmer.

The innovation: No claims forms, no insurance agent, just automated payouts once specified conditions are met.

Many of these real-world applications are already beginning to be built and tested.

Limitations and risks of smart contracts

While smart contracts open up a range of opportunities, they also present risks and challenges:

• Coding vulnerabilities: Bugs or errors in the contract's code can be exploited, leading to potential financial losses.
• Legal uncertainties: There’s a consistent question surrounding legal uncertainties, that question being “are smart contracts legally binding?”. As of right now, smart contracts are not yet legally binding. While some jurisdictions, such as the UK and several U.S. states, have recognised that smart contracts can be legally binding under existing contract law frameworks, global regulators will need to come together to establish common standards.
• Irreversibility: Once deployed, smart contracts are complicated to alter, meaning errors can be permanent if not caught early.
• The data is basic: While smart contracts are potentially powerful, they are complex to analyse. You can get a sense of this by viewing Etherscan.io, which monitors transactions on the public Ethereum blockchain, and where you can see an example of an Ethereum smart contract.

BTC Markets encourages users to learn about these risks and stay informed through our Learning Hub and Blog, where we offer resources to help you navigate the evolving crypto landscape safely.

Cryptocurrencies supporting smart contracts

Several major cryptocurrencies have integrated smart contract functionality, for example:

• Ethereum: The leading platform for smart contracts and decentralised applications.
• Solana: Known for its high-speed, low-cost transactions and smart contract capabilities.

You can explore and trade cryptocurrencies like Ethereum and Solana on BTC Markets.

Invest today with BTC Markets

Smart contracts are reshaping industries and building the foundation for decentralised finance, digital ownership, and automated agreements. As this technology continues to grow, BTC Markets is here to provide the tools and trusted platform you need to participate confidently.

Start your journey into the world of smart contracts today with BTC Markets, Australia's premier cryptocurrency exchange.