Smart contracts have changed the way business is conducted in the modern world. They have facilitated efficiency, transparency, and security in various business processes.
Smart contracts are self-executing contracts that have the written terms of the agreement between the buyer and the seller incorporated into lines of code. These agreements utilize blockchain technology, that guarantees their safety, transparency, and immutability.
The idea of a smart contract was first presented of by computer scientist and cryptographer Nick Szabo in 1994.
Szabo said that these new contracts are called “smart”, because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises.
However, it wasn't until the creation of blockchain technology, specifically with the release of Ethereum in 2015, that smart contracts became commonly utilized.
How Smart Contracts Work
Smart contracts are based on blockchain technology, which is a decentralized, distributed ledger that maintains transactions between multiple computers.
Each smart contract is a specific piece of software that is stored on the blockchain, and which is automatically executed when certain prerequisites are met.
Here's how smart contracts work:
1️⃣ Agreement.
Just like a traditional contract, two or more parties agree on the terms of the contract.
2️⃣ Coding.
The terms of the contract are written in code in a programming language designed specifically for smart contracts, such as Ethereum’s Solidity.
3️⃣ Deployment.
Smart contracts are implemented on the blockchain network so that all participants can access it.
4️⃣ Execution.
Once the contract conditions are met, the contract executes automatically. This eliminates the need for intermediaries and reduces the possibility of fraud or abuse.
5️⃣ Transparency.
Smart contracts are characterized by transparency, allowing all parties to view and execute the code. This promotes trust and accountability between participants.
6️⃣ Immutable.
Once a smart contract is created, it can no longer be changed or manipulated. This provides a high level of security and prevents accidental changes without the consent of network participants. This ensures that the contract terms are transparent, tamper-proof, and enforceable without the need for intermediaries.
Key Features of Smart Contracts
Smart contracts have several distinguishing features that attract both individuals and businesses.
Self-execution
The contract's stipulations are automatically implemented without human assistance when conditions are met.
Immutability
Once initiated, smart contracts are unable to be altered, this ensures the authenticity and trustworthiness of the contract.
Trustworthiness
Smart contracts do not involve legal professionals such as lawyers or financial institutions to enforce the terms of the contract. Instead, they use code to automatically adhere to the rules and regulations listed in the contract. This eliminates the reliance on third-party intermediaries.
Applications in Modern Business
Smart contracts have the potential to have a transformative effect in multiple areas.
Supply Chain Management
Smart contracts augment transparency and efficiency by automating processes like tracking items, verifying authenticity, and paying off in a timely manner. This decreases the likelihood of fraud and mistakes.
Real Estate Transactions
In real estate, smart contracts can automate the process of selling properties, reduce paperwork, and have a quicker effect on processes like transferring payments and keeping them in escrow. This facilitates transactions that are quicker and more dependable.
Financial Services
The financial sector is beneficial to smart contracts due to the automated payment of fees, the settlement of transactions, and the management of complex financial instruments, all of which reduce costs and increase accuracy.
Legal Agreements
Smart contracts automate the enforcement of legal agreements by ensuring that the terms are automatically followed. This decreases the necessity of formal arbitration and speeds up the implementation of agreements.
Case Studies and Examples
Several companies have already implemented smart contracts to simplify their operations and increase efficiency.
Supply Chain Management: IBM and Maersk
IBM and Maersk created a blockchain-based platform called TradeLens, this platform utilizes smart contracts to facilitate the efficient flow of global trade. The platform diminishes paperwork, increases transparency of data, and speeds up the movement of goods.
Real Estate: Propy
Propy, a platform dedicated to real estate transactions, employs smart contracts to facilitate international real estate exchanges. It automatically processes the entire transaction process, this ensures transparency and security.
Business and Personal Protection: AXA Insurance
AXA initiated a product that offers insurance against flight delay, Fizzy, which employs smart contracts to automatically compensate policyholders if they are delayed by more than 3 hours. The smart contract causes a payment based on information from global traffic databases.
Benefits of Smart Contracts
The implementation of smart contracts has multiple benefits.
✅ Efficiency and Speed
Smart contracts automate procedures, which reduces the necessary amount of time to fulfil agreements. This causes transactions to be more rapid and leads to increased efficiency in operation.
✅ Reduction of Costs
By removing middlemen and reducing costs associated with bureaucratic processes, smart contracts have the potential to greatly reduce the expenses associated with traditional contracts.
✅ Security and Transparency
Smart contracts are characterized by a secure and clear mechanism for enforcing agreements. The immutable nature of the blockchain guarantees that contracts cannot be altered, and all parties can have faith in the authenticity of the transaction.
Challenges and Considerations
Despite the benefits, there are still specific issues and concerns associated with smart contracts.
⛔ Potential Risks
Smart contracts are not without dangers. Vulnerabilities in the code can allow exploits, and misuses can have significant effects. Additionally, legal issues are caused by the lack of a formal regulatory regimen for blockchain-based contracts.
⛔ Adoption Barriers
The implementation of smart contracts is inhibited by technological impediments, such as the requirement for professional developers and the complexity of integrating with existing systems. Also, regulatory ambiguity is significant in preventing the widespread adoption of regulations.
Future of Smart Contracts in Business
Emerging trends include the integration of smart contracts with the Internet of Things (IoT) to automate the complex interactions between devices and to develop more user-friendly platforms for creating and deploying smart contracts.
Over the long term, smart contracts have the potential to revolutionize multiple industries by providing a more efficient, safe, and cost-effective method of executing contracts. As new technology develops and existing regulations increase, it's expected that its adoption will increase significantly.
Conclusion
Smart contracts are expected to have a significant impact on business modernity, providing benefits like efficiency, cost-cutting, and security. Despite obstacles, the future potential of smart contracts is positive, these contracts have the potential to change industries and define the way agreements are conducted. As companies continue to investigate and adopt this technology, the landscape of contract enforcement will change, which will lead to a more automated and transparent world.
