Today, the idea of “smart contracts” is a promising cloud technology for storing various kinds of papers. In this post, we will clarify what smart contracts stand for, how they work, and why you need them.
What are smart contracts?
For ordinary users, a smart contract is an analog of a paper contract that is kept in electronic form. From a technical point of view, a smart contract is a piece of code that defines a set of actions to occur when certain conditions are met.
With smart contracts, you can buy, sell, rent, trade without involving a go-between. If you want to get a clear understanding of the operating principle, think of the penny-in-the-slot machine. In a traditional model, you would contact a notary or lawyer and then wait to receive a needed paper. In a smart version, you insert a crypto coin into a slot machine and get your film subscription or health insurance pop up.
There is no way to fool a smart contract. If one of the parties does not fulfill the obligations, it is subject to fines or other sanctions. The other side, in turn, receives full compensation.
How do smart contracts work?
Let’s imagine that you are a clothing manufacturer who wants to expand markets. You decide to ship the goods to a new country and want to minimize the risk of non-payment. To do this, you contract with the client. Your agreement is a micro software that defines the conditions and relevant actions. It says that in case of successful payment of the first batch of goods, you ship the next one.
If you translate the program code into spoken English, it will look something like this:
If client X receives item A and if client X pays for item A, then send item B to this client.
Since the smart contract is self-running, you don’t need to involve third-party experts to verify and control it. Thus, you save time, money, and eliminate the risk of fraud.
Note that smart contracts are reusable. Once you write a program, you can utilize it as many times as you like with other input data.
Typically the manufacturer and client would use Cash on delivery or Prepayment to clinch a deal.
In the first case, the buyer pays a fee for the transfer of money. If the buyer does not pick up the goods, the seller loses money for sending back and forth.
In the second case, the buyer risks losing the deposit if the seller does not send the goods. Also, it will take time and costs to make a refund if the product does not meet expectations.
With a smart contract, cheating is impossible. If contract conditions are not met, each side gets back money and goods without commissions and overpayments.
Let’s see the behind the scene actions that take place in a program.
- A clothing manufacturer and a client put value into an information repository. Once the value is placed, it cannot be quickly withdrawn.
- The client puts money for goods.
- The manufacturer places a tracking number.
- The manufacturer receives payment confirmation, and the buyer gets a tracking number.
- If the buyer picks up the package, the manufacturer receives the money.
- If the buyer doesn’t like the product, they don’t pick up it and get money back.
- If the buyer doesn’t come to the post, the seller gets the cost of delivery there and back, and the buyer receives the rest of what they paid.
- When both parties complete the terms of the contract, the contract gets automatically closed and remains in blockchain storage.
Once you write a program, you can utilize it as many times as you like with other input data. In our example, after the successful deal with buyer A, the seller can use the same contract to run the transaction with buyer B. The logic remains unchangeable. In essence, the buyer pays the money, and the seller gives the tracking number.
Of course, such a smart contract can serve any seller of goods or services. Moreover, we can stuff it with features to fit every taste: calculate individual prices, provide discounts, implement cost-sharing, etc.
How does a smart contract differ from the traditional agreement?
Today, a legally certified contract is the most common method of concluding a transaction. Nevertheless, it has many shortcomings and losses to a smart contract by many metrics. Let’s see a detailed comparison of two approaches.
|Smart contract||Traditional agreement|
|A program or transactional protocol based on blockchain||Paper record|
|Written in a computer language||Written in a legal language|
|No way to change contract terms||Possible to change or interpret differently contract terms|
|In case of breach of contract, sanctions come automatically||In case of breach of contract, you should go to court|
|No middle-man||Presence of a middle-man|
|Transactions go in crypto currency||Transactions go in currency via bank|
|Instant fulfillment of contract terms||Delayed fulfillment of contract terms|
|To conclude a contract personal presence is not required||To conclude a contract personal presence is required|
|Guaranteed transaction security||No guarantee of safety|
Smart contract use cases by industry
Blockchain smart contracts significantly reduce costs and increase the efficiency of your business, regardless of what area you work in. Let’s review the most trending spheres of use.
Banking and finance
Smart contracts can cover a full range of banking services and make it fully automated. You can enter into a loan agreement, open a deposit, transfer money based on the conditions prescribed by the program. To give you a live example, imagine that you get a car loan in a bank. In case you do not make a monthly payment, the car gets blocked.
KYC-Chain develops contracts for individual entrepreneurs and large financial organizations all over the world. They allow audits and calculations in real-time following international legal acts. In such a manner, processing time and the likelihood of errors and delays reduce to a minimum
Blockchain has excellent prospects in the healthcare sector. To date, the problem of quick access to medical history still exists. However, the ability to instantly receive information is critical in urgent cases. Another issue is patient identification. Oddly enough, we have a rather large percentage of inappropriate treatment appointments due to mistaken identity.
With smart contracts, it is simple to automate access to clinical records. The unauthorized entrance is impossible, thanks to a decentralized system of data storing. Blockchain technology establishes the direct link between the client identity and their medical data, which means that the risk of medical error tends to zero.
Dentacoin is an excellent example of smart contract applications in healthcare. It brings together patients and doctors and facilitates the treatment worldwide.
Blockchain helps execute any transaction without involving a third-party law office. You do not need to pay for notarization and spend time traveling elsewhere. A smart contract performs legal services and guarantees that each party complies with obligations.
The law-related cases of using smart contract cover
- digital signature
- intellectual property
- the cross-machine remittance
- property priorities
- decentralized self-ruling institutes
- restricted liability autonomous organizations
Nottar.io shows one of the Ethereum smart contract use cases, notarising papers with the help of blockchain technology.
Assume that you have decided to rent out your apartment. Instead of posting it on Airbnb or another similar site, you enter into a smart contract with a potential client. Using the program, you give the tenant the apartment number and the code that opens the door, and the tenant, in their turn, deposits the money.
As soon as the tenant enters your apartment, you receive money. If you give the wrong code, the client gets money back. If the tenant does not arrive, you get paid for out-of-service time; the tenant receives their money minus the sum paid to you.
FOAM offers smart contracts blockchain explained cases that enable various operations with real property.
Picture: Smart contracts make renting simple
As a rule, oil and gas companies must go through a large number of authorities to sign and fulfill a contract. For example, the top-level government takes a direct part in the transportation of gasoline; transport companies carry out delivery; many workers undertake related works. In practice, it is very difficult to establish a smooth process with so many participants. Companies often suffer losses due to inefficient methods, and the environmental conditions are getting worse due to rash measures.
A smart contract can solve this problem by clearly distributing the roles of participants. Each subsequent action will take place automatically upon completion of the previous one. It is only a small part of what such contracts can do. World Economic Forum has listed 65 smart contracts explained cases that are going to contribute to world sustainability.
Blockchain experts push for online elections at the local and state levels. It becomes possible thanks to digital identity, which is a combination of relevant, high-quality digital data distributed in a vast network of data warehouses. Blockchain smart contracts guarantee that no one except the data owner may access the sensitive information. Also, there is no way to go wrong with a person’s identity.
As we speak, Horizon State, the Australian company, is putting such a project into practice.
When buying luxury goods, clients want to be sure of their unicity and authenticity. Smart contracts help track the entire history of a thing, starting from the manufacturing material, ending with the final point of sale. Also, the user can read the story of the creation and find out interesting facts.
Concerning industrial goods, the buyer can check their organicity and track the delivery history from farm to table.
Verified Organic and Aura are smart contract applications that offer full access to the history of luxury food, clothing, and interior design items.
Smart contracts blockchain prospects
Decentralized blockchain technology is still under development. But even now, distributed registries bring undeniable benefits to the business. They make the operations fast, transparent, and more reliable.
Many large corporations and middle-size companies have already enjoyed the advantages of using smart contracts. Small companies keep up with them and gradually move to a decentralized blockchain system.
If you are interested in distributed technology that can boost your economic numbers, feel free to contact us. We will advise on the best use case for your business.