Blockchain technology is the trending topic at the moment as it is the underlying technology behind the bitcoin and other cryptocurrencies. Blockchain and cryptocurrency go hand in hand just like the Internet and email, however, in the same way as you can do more with an internet than just send emails, you can do a lot more with blockchain than just use it for storing bitcoin.
The blockchain is a new type of database that can’t be corrupted or compromised. This is because it is a decentralized system that is distributed across a number of different hosts. The transactions are digitally recorded and linked together to provide the entire history of an asset. The transaction is added to the blockchain only when it is validated using a consensus protocol ensuring it is the only version of the truth and each record is then encrypted to provide an extra layer of security. The blockchain is said to be immutable as the record can’t be changed and is transparent because all the participants to a trade have access to the same version of the truth. However, if one version of the ledger is corrupted or compromised the other instances will remain unaffected, and this makes blockchain a highly versatile technology that has applications across a wide range of industries.
One of the blockchain’s most promising applications is the field of Smart Contracts, that’s because as an interoperable and incorruptible system it can add an extra layer of openness and security. It can raise people’s confidence and pave the way towards a fairer system. Smart contracts are becoming increasingly relevant for business solutions developed on blockchain due to this. However, much like the concept of blockchain technology, smart contracts are often interpreted as something they are not.
Not every blockchain utilizes smart contracts, but for businesses looking to create secure solutions on a decentralized network, it’s critical that they understand what smart contract are and how they work.
Here I will explain what smart contracts are, their different types and how they work so that you can implement them in your business with ease.
What are Smart Contracts?
The concept of smart contract might be new to most, but they were actually invented in 1994 by a legal scholar and cryptographer Nick Szabo. He recognized that a decentralized ledger could be used for smart contracts also known as self-executing contracts, digital contracts or blockchain contracts. Here the contracts could be converted into computer code, stored and replicated on the system and supervised by the network of computers that run the blockchain.
Simply put, smart contracts offer a way to exchange, money, property and other valuables in a completely transparent and conflict-free way. This eliminates the need for middlemen to mediate the transaction between two parties. The contracts when stored can be accessed by all parties through a decentralized system, and any attempt to change the contract could be rejected, and all stakeholders will be automatically informed. They are easy to use once the infrastructure is in place and effectively functions as automated lawyers. Here an example would help to better understand.
Consider an example of a crowdfunding where product teams share their projects and collect money from supporters until the goal is reached. If such a system is centralized by say any company, then that company acts as a third party between the product team and supports. This means that both sides need to trust the company and in fact pay additional fees to them for serving as an intermediary. On the other hand, a smart contract can perform the crowdfunding actions like sharing projects, setting goals and collecting money without a third party and without paying any additional fees. If a certain project gets fully funded before the deadline, the money raised automatically goes to the product team, however, if the project fails the money automatically goes back to supporters. This is very beneficial to both the parties since a smart contract is stored inside a blockchain where all data is stored in a distributed manner, and no one is in control of money.
Types of Smart Contracts
Smart contracts is the software that runs on blockchain and the complexity depends on the strategy that you would use to solve your business problem. Smart contracts are grouped into two:
- On-chain Smart Contracts – They are executed when a transaction happens on the blockchain and are stored right inside the blockchain.
- Installed Smart Contracts – These smart contracts are executed before the commit happens to the ledger or before the network is launched.
How do Smart Contracts Work?
If you are considering implementing smart contracts, blockchain development services can help you create a contract that sets a range of criteria to validate multiple transactions. The transactions are not just limited to a simple give and take exchange of value but include dates, qualities, and quantities and other specifications should be met if the transaction is to be considered valid. The instructions in smart contracts are embedded within the code and work by following simple if/when..then… statements and are not possible to change unless all the parties agree to.
A network of computers executes the actions when predetermined conditions have been met and verified. For example, the second stage of transaction can’t take place until the first one is completed just as in group signature, where business transaction is valid only when a certain number of people have signed. Another example, consider buyer B wants to buy something from seller A, so the buyer B puts the money in escrow account, the seller A uses shipper C to deliver the product to buyer B. When the product is received by buyer B, the money in the escrow account will be released to seller A and shipper C, however, if the buyer B doesn’t receive the delivery by the intended date, the money in the escrow account will be returned. When this transaction is executed, the manufacturer D will be notified to create another item that was sold to increase supply. All this is done automatically.
Many stipulations as needed can be used in the smart contract to satisfy the participants that the task will be completed in the manner they want.
The Advantages of Smart Contracts
Here are some of the advantages of smart contracts:
- Security – Automated contracts us the highest level of data encryption which is the same standard that modern cryptocurrencies use. This level of protection makes them more secure.
- Transparency – The terms and conditions in the contracts are fully visible and can be accessed by all relevant parties and there is no way to dispute them once the contract is established. Thus offering total transparency of the transaction.
- Accuracy – Smart contracts record all the terms and conditions in explicit detail using codes which would otherwise be accomplished through manual means. Hence they increase the speed of business processes and are less prone to manual errors.
- Speed – The smart contracts run on software code so they can execute transactions very quickly. This speed can save hours for many traditional business processes as there is no need to process documents manually.
- Storage and Backup – Smart contracts record essential details in each transaction and whenever your details are used in a contract, they are permanently stored for future. In case of data loss, these attributes are easily retrievable.
- Disintermediation – Smart contracts enable parties to enter into agreements with reduced dependence on middlemen.
The above-mentioned are some of the advantages, however, implementing smart contracts is not without its share of challenges, but smart contract services provider can be of great help. There are various intricacies to it that hamper its immediate adoption. Here Blockchain Australia can help as they have the blockchain development experts who understand the below-mentioned challenges and work towards addressing them to help successful implementation of Smart Contracts in your business.
Though companies desire transparency they hesitate to put their contractual information, which may contain competitive strategies on the blockchain. However, this shouldn’t be as blockchain platform is permission driven and enables parties to engage in a private smart contract which is only visible to people in the individual contract and not anyone else until you grant permission. Some of the blockchain platforms do not have private smart contracts; here enterprises need to select their blockchain platform based on needs.
Since the smart contract is a computer program, each term and condition needs to be coded. There is a possibility of misinterpretations and the omission by the coder, which may lead to loopholes in the contract. However, the Blockchain Australia’s blockchain development services experts have the expertise and experience to hand this, and when getting the implementation through them, you will face no such issue.
- Bugs and Errors in Code
Bugs and errors could lead to disputes and procedural difficulties related to identifying errors and could also lead to unforeseen repercussions. However, the blockchain experts with experience of various years should be hired as they have the expertise and tools which help them in error-free coding so that no issue occurs later on.
Smart Contracts Use Cases
Smart contracts are gaining popularity and have already been implemented in various industries. Let’s take a quick look at them.
Banking is the primary industry where smart contracts appear to be the most significant alternative to the traditional model of transactions. With smart contracts payment as well as loans and nearly all other financial operations are literally automated. Smart contract manages approval between participants, calculate trade settlement amounts and transfer funds automatically. The smart contracts also help store KYC data and share it on a private network of banks using the multi sign for consent and validation.
Smart contracts are also very beneficial in the healthcare industry where they help provide transfer and or access to medical health records with multi-signature approvals between patients and providers and help track patient’s health-related actions through IoT devices and automatically generate reports. Smart contracts also help streamline the processes for insurance trials and boost confidence in patient privacy.
- Supply Chain
Another area where smart contracts can be very beneficial and provide real-time visibility is the supply chain. Here smart contract ensures inventory tracking, benefitting supply chain financing as well as reducing the risk of theft and fraud. Various supply chains have successfully implemented smart contracts technology where users can exchange cryptographic assets on the blockchain in the form of domains.
- Real Estate
Real estate projects are complicated and comprehensive where we need to interact with agents, inspectors and other third-party service providers to buy or sell the property. Smart contracts get rid of middlemen thus reducing the cost, and all the transactions and contractual agreement between both parties are done directly. The rental payments are triggered and delivered automatically as scheduled. Smart contracts offer complete transparency and safety in security deposit and rental payments.
- Legal Issues
The traditional model of resolving legal issues and certifying documents was complicated and involved a lot of paperwork and middlemen, this all gave way to smart contracts. Smart contracts help eliminate the need for notarization, offering not only automated and unbiased but also cost-efficient solution as it removes the middlemen and no need to pay them the extra fees.
The government also benefits from the smart contracts. Here smart contracts help in digital identity where it records and stores data on a network owned by the government and any changes in the data are tracked. Facilitates asset tracking and validates voter criteria.
- Internet of Things
There are areas where smart contract intersects with other technologies, and the IoT is one of them. A combination of both these is powerful and can enable significant transformation across industries paying the way for new distributed applications.
Now that you know that it is benefitting various industries and have a better understanding of smart contracts and their benefits, I’m sure you must have thought of some ways to implement them in your business and by visiting the website offering smart contract implementation, you can get expert advice.