Blockchain technology has been implemented in most business firms to increase their efficiency and performance. To automate the process of transactions blockchain platforms are accompanied by smart contracts. Not all blockchains contain smart contracts but those with smart contracts offer numerous advantages.
What are Smart Contracts?
Smart contracts are digital protocols stored on a blockchain network that automates the verification, execution, and processing of an agreement. Nick Szabo is widely regarded as the father of smart contracts and the creator of Bit Gold, a precursor to Bitcoin. A smart contract processes all transactions in a blockchain platform automatically once predetermined conditions are met.
It can either work independently or in combination with many other smart contracts.
There are three components in a smart contract specifically termed objects.
- Signatories
- Subject of agreement.
- Specific terms.
Smart contracts eliminate the hurdles of traditional contracts.
Advantages of Using Smart Contracts
- Automatic transactions
Smart contracts automate transactions when predetermined conditions are met. This eliminates the need for intermediaries.
- Fast and efficient
Since the transactions are made automatically, they are faster and more efficient than traditional contracts. A traditional contract transfers payment through a third party, taking days or weeks to complete the process.
- Backup data
Documents stored in the blockchain are copied multiple times, allowing easy retrieval when any data is lost.
- Security and transparency
Smart contracts run on blockchain, a highly secured platform. The data are encrypted and immutable, preventing the chances of altering codes.
Codes in the smart contracts are visible to everyone using the platform, enhancing the transparency of the system. However, no alteration can be made.
- Accuracy
A smart contract eliminates the chances of errors like traditional contracts. Once the code is written, it accurately processes the transactions without error.
- Low transaction cost
As there is no involvement of third parties, the transaction costs are less compared to traditional contracts.
Use Cases of Smart Contracts
Smart contracts are used in many industries, aiming to increase the efficiency and performance of the firm.
1. Health care system
Smart contracts have been widely used in healthcare firms. Blockchain stores health records of patients and secures them with a private key. Access to the record is given only to specific individuals, ensuring security. Smart contracts help to conduct confidential research without sharing the data among unauthorized participants. Blockchain technology helps in verifying the authenticity of the data.
2. Voting system
Smart contract-aided voting is protected in blockchain ledgers, and decoding them requires complete alteration of the blockchain platform, which is nearly impossible. The secure environment created by smart contracts eliminates the possibility of manipulations.
Due to the heavy lineups and verification process in the traditional voting system, many citizens are taken aback from voting. However, smart contract-assisted voting verifies the voter’s identity automatically and allows them to cast the vote without much hurdle.
3. Supply system
A traditional supply system involves many intermediaries. Processing the supply requires approval from all the associated firms, making it a difficult process and even causing fraud and loss. Using a smart contract in the supply system helps in their smooth functioning and also automates transactions.
4. Financial systems
The use of smart contracts in financial platforms varies from one another. It performs error checking, routing, and processing of transactions in insurance claims while it tracks data in accounting. Sometimes helping in decision-making and sometimes in the transferring of funds.
5. Ownership status
Smart contracts can be used to offer fractional ownership status. It helps in the segmentation of property among individuals, allowing percentage ownership for individuals buying the tokens.
6. Mortgage industry
The mortgage industry is tangled with third-party risks and time-consuming processes. Smart contracts automatically analyze proof of funds and payment planning, allowing validation of transactions without the need for lawyers or any other intermediaries.
7. Retail system
Implementing smart contracts in retail systems enables fast payment and real-time tracking. It also reduces the transaction cost benefiting both customers and merchants.
8. Digital identity
Connecting a smart contract to different online services allows counterparties to know about the individuals without revealing their identity.
Limitations of Using Smart Contracts
- Immutable
Though immutability is considered an advantage, any errors in the code can’t be changed or will be time-consuming and costly. As all the blocks are interconnected, the data are shared among the whole blockchain, and clearing an error will result in a change in the entire system.
- Exploitation of loopholes
As smart contracts are rules and regulations written in codes to process a transaction, it is difficult to analyze whether the terms and conditions meet the needs of the participants. Any error in code will result in transactional issues and even allow unauthorized transactions.
- Intruding of third parties
A complete elimination of third parties can’t be guaranteed in smart contracts. For example, lawyers will not be required to create contracts but to understand the terms in smart contracts, developers need the assistance of a lawyer, who is considered a third party.
- Finite functionality
Smart contracts can’t carry out all types of contracts. They are mainly used in contracts having simple binary outcomes. They generally involve if and else algorithms. Complex algorithms reduce the efficiency of smart contracts.
- Technical complexity
The development and implementation of smart contracts require assistance from technical experts and advanced tools, making it difficult for many business firms and individuals to access the benefits.
Final Thoughts
Smart contracts enable automatic transactions once predetermined conditions are achieved. Though smart contracts are costly, their implementation in the business firm offers many benefits, making the firm more efficient and advanced. However, the occurrence of errors in smart contracts can result in high losses.
