October 23, 2021

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What is a ‘smart contract’ and what is it for?


This article was translated from our Spanish edition.

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A ‘ smart contract’ , or smart contract , is a tool that years ago was only in the imagination of developers and that is currently a reality. This is a legal agreement between two people or companies and it is executed by itself using a computer program, so it does not need an intermediary.

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According to the study What are smart contracts on blockchain? Carried out by IBM, these types of contracts are similar to traditional ones in terms of content, the difference is that the terms between seller and buyer are encoded in computer language, so the conditions are stored and transferred using blockchain or chain of blocks. With this they automate and facilitate the execution of the terms. The benefit is that negotiations are speeded up, ecommerce is driven and become more efficient and streamlined procedures.

This technology, due to its characteristics, offers benefits such as data distribution through different servers, decentralized management, unalterable or data that cannot be erased and, due to its encryption system, guarantees a safe experience for users.

“When it is said that a ‘smart contract’ is executed by itself, it refers to the fact that the program performs actions autonomously when certain conditions determined in the agreement are met. For example, when certain objectives are met, the contract automatically releases some previously agreed funds, ”explains Gustavo Parés, director of the Mexican company specialized in Artificial Intelligence, NDS Cognitive Labs.

Artificial Intelligence (AI) is one of the technologies that have a preponderant role in the development of these contracts. Along with the blockchain , AI forms a tandem that makes the existence of this new form of business organization possible. This technology is responsible for conducting assessments and recognitions to provide key information to decision makers, and thus generate more beneficial agreements for both parties.

Through machine learning methods and predictive analytics, Artificial Intelligence is a cornerstone in the shaping of smart contracts. These tools allow you to improve decision making, optimize and adjust terms. Through Natural Language Processing (NLP), bad practices can be avoided when making an agreement.

The benefits of smart contracts

The application of ‘ smart contracts’ can facilitate some sectors such as electronic commerce, financial and insurance services, as well as bureaucratic procedures, among other activities.

Some of the main advantages of this type of agreement are:

  • Security Thanks to blockchain technology, transaction records are encrypted, making a cyber attack much less likely.
  • Transparency Through smart contracts, users can define the conditions of an agreement. Due to the immutability characteristics of data in blockchain , the risk of someone modifying the terms is reduced.
  • Efficiency and speed . Smart contracts are digital and do not require physical paperwork. This can speed up the processes for a contract to come into force.
  • Cost reduction . Since the process is done digitally, no intermediaries are needed. This can help reduce costs.
  • Updates . Smart contracts have the ability for the agreed terms to be updated and adjusted autonomously without the need to carry out a new process.



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