The future lies in innovation, and every business knows that. Smart contacts are among the most trending innovations which are supposed to revolutionize and drive the future. A smart contract Blockchain is currently the most popular representation of successful exercising this approach. Still, while many altogether misunderstood this technology, those who’ve already realized its power are actively implemented smart contract protocols into their businesses to gain benefits.
Smart Contacts: WHATs and HOWs
Let’s make it clear what a smart contract is and how it works.
In its essence, a smart contract is a computerized transaction protocol. This protocol allows executing contact when all terms and conditions are met by two parties. A key distinguishing feature of smart contacts is that there is no need for individual approval to run a contact; everything is conducted automatically by a system. As mentioned above, this digital agreement entails satisfying common contractual conditions to fulfill a contract. They are terms of payment, confidential policy, etc.
There are two major advantages of smart contact:
1. A high level of security. A contract is tamper-proof and reliable digital agreement. In other words, it excludes a need for any sort of intermediary which, in its turn, eliminates the possibility of security issues related to third-party involvement, including fraudulent activities, as well as increased transactional fees. Also, such incorporated security creates an environment where the parties do not need to make backup copies, that significantly speeds up the process of contract execution and reduces possible conflicting workflows.
2. Deterministic origin. While the traditional contacts can be fulfilled under the wrong conditions or not be executed at all because of some kind of error when a contact is in work, smart contacts fully expel such scenario. There can be any ambivalence, contact is always implemented in accordance with pre-established conditions. If everything is met on this stage, each following step do not require additional approval, the process is automated.
To understand how smart contact works, it is vital to realize that it is a scripting language overlaid on the blockchain. Keeping it simple, a script contains “if/then” conditions which enabling to monitor what is going on in a certain market and execute a contract. The “if/then” conditions vary among smart contract developers, being closely related to specifications. So, these conditions determine the inputs and outputs of the smart contract. To understand this concept, let’s assume that the input is a market price on the asset at a given time, and the output is making a payment to the other party. Thus, if the price encrypted in the contact matches the market one, an agreement will be fulfilled.
First-Line Applicationsof smart contract blockchain
The smart contracts can be used in various fields where the business activity implies purchasing or exchanging goods and services. According to Chainlink whitepaper, there are three major sectors which benefit the most from this technology adoption: insurance, derivatives, and trade finance.
Insurance is an industry where trust is extremely important, as it determines the success of a business. Nowadays, many people do not eager to buy insurance because of the lack of trust in the system. Smart contact can fix this issue by establishing trustful relationships between the insurance companies and policyholders. It fully removes human intervention which could lead to errors in records, unreasonable claims, and fraudulent filing of the claims.
Derivatives are another industry where smart contacts can realize its potential to the best advantage. The derivatives market is a “high value/low trust” environment. With smart contracts, the parties can greatly reduce the additional costs, guarantee on-time delivery of payments, as well as provide automated processing of the backend contract operations. Moreover, parties will be able to employ better risk management.
Trade finance is among the industries with drastically outdated infrastructure. There is a huge room for human errors which slow down the process of contracts execution and lead to their cancellation sometimes. Rather, smart contacts make it possible to keep all the information transparent, ensure data security and accuracy of its processing, and make automatic payouts based on data received.
Other Possible Applications of smart contracts blockchain
Despite the fact that blockchain smart contracts are used primarily for transferring of cryptocurrency nowadays, there are many other areas this technology can intersect with other ones. Internet of Things (IoT) is a prominent one. A bland of IoT and smart contacts gives the green light to novel distributed applications which are more transparent, executed in a deterministic way, and all interactions with a smart contract are logged in the blockchain. Here is just a few of them:
- Agriculture. The farmers could be able to automate most of the processes such as irrigation or soil fertilization with the programmed trigger values.
- Real estate. If the rent is paid not on time, the apartments are automatically locked until the payment is made.
- Health care. First of all, smart contacts secure access to personal health records (and if needed, timely sharing them for clinical trials and research). Also, it grand the doctors’ opportunity to provide insurers the proof of completed surgeries to ease the process of coverage payments. Finally, the supervision of drugs and other medical supplies becomes more accurate and careful.
- Supply chain. In this field, smart contracts allow close inventory tracking, efficient financing of the supply without extra funds spent, and, what is most important, a decreased risk of theft and fraud. All these help to make transportation less expensive and more economically sound.
- Legal issues. Smart contracts also can transform the traditional model of resolving legal issues and certifying documents. For example, it can wipe out the need for notarization, making the process fully automated, unbiased, and cost-efficient.
Challenges On The Way
Blockchain smart contracts are not a panacea as come with some challenges.
First of all, there is a great risk of cyber attacks on smart contracts powered systems. Additionally, there is also a risk of bugs or defects which cannot be instantly recognized.
The second challenge is the cost. Implementation of smart contact technology into any business requires enormous funds. This can become a longstop for many entrepreneurs as such and industries as a whole. Furthermore, a human mistake during the codding can inflict immense losses.
Lastly, there is no regulation for smart contracts now. If there is no legislative framework for smart contacts, all benefits this technology can bring are vanishing. That’s why a proper regulation is a top-priority initiative.
The Blockchain smart contract technology is still in the infant stage of its development. The vast majority of its use cases are represented by cryptocurrency transferring. However, the buzz around smart contracts is growing. The opportunities for its application are numerous and not limited to the financial sector (they are spread to such fields like health care and legal regulation). In spite of the benefits such as increased data security and deterministic nature, there are several challenges which slow down the process of implementation of the smart contacts. The main of them is lack of legislative maintenance. In any case, the future is indefinite, but the truth is that smart contacts are an inevitable part of it.