What are Smart Contracts and how are they related to Blockchain technology? Here we explain what the term means and outline some benefits Smart Contracts have to offer to companies around the world.
Organizations, companies, and enterprises are complex systems that require a variety of different processes involving data and people so they can accomplish their goals. In many cases, these processes have a wider scope than an isolated system and may need the interaction with external entities to achieve those objectives. If we talk about a financial organization, for example, those processes can be performing a payment, doing investments, among others.
To help improve these processes in different ways, Smart Contracts take the stage as they increase security, make the processes more transparent and faster, and drive down costs.
To talk about Smart Contracts, we should start from the roots of their intrinsic technology. A Smart Contract is not an actual contract as it may sound but a piece of software stored and available to be run over a Blockchain. It follows the principles of immutability, transparency, and security that are provided by having a distributed digital ledger as the backbone of this technology.
But what is a Blockchain?
A Blockchain can be viewed as a distributed digital ledger in which groups of parties trust each other regarding the data, state of the ledger, and the operations that are introduced to it. Therefore, at any point in time, the information is consistent and accurate, and every party agrees on it.
The most common practical usage of this technology and the one that brought it to the mainstream is Bitcoin, a digital currency that functions without the need of any financial intermediator or any centralized technology. The reason why it is so attractive is the fact that it does not belong to any entity in particular — it has no owners. The information stored is cryptographically stored and protected and is immutable. Nobody can even attempt to change or adulterate the data, and it is visible to anyone.
Take a look at this: What can blockchain technology do for your business?
How does Blockchain technology relate to Smart Contracts?
Smart Contracts extend the features provided by the Blockchain itself, from a ledger for financial transactions to a wide range of domains and functionalities. They are coded algorithms that implement a set of rules agreed to by all the parties running the Blockchain. These contracts run at any point in time resulting in a series of outputs that are trusted by the whole ecosystem and with no risk of failure.
As the Smart Contracts run over a distributed Blockchain, they inherit the same principles and features from the former such as immutability, transparency, and security. Of course, no third parties will be involved in the code run, making the whole transaction transparent. Additionally, the information will be stored into the Blockchain after a consensus occurs among all the Blockchain nodes without any third-party mediation.
Why should we give this technology a try?
When we talk about Smart Contracts, we simply refer to computational code of any kind written as such in any computer language. They provide solutions for an infinite range of domains, from financial services, insurance, medical health, and supply chains, to trade, mortgages, land title recording, and so on. The key concept that makes Smart Contracts so powerful is that they are implemented over a Blockchain backbone, inheriting the benefits from it.
The execution of the contract code over the Blockchain provides many advantages that will make the difference from running a centralized software. Among them, in addition to the lack of intermediaries needed, we can add:
- Transparency, as the data is acknowledged by the Blockchain nodes and stored in a decentralized architecture.
- Low costs, as there will not be the need for fee payments.
- Automatic execution, as it will be run when specified conditions are met.
- High speed, as manual processes can be replaced by automated ones.
What are the benefits of Smart Contracts?
Smart Contracts bring many benefits to the processes that will make a difference with those in which old-fashioned techniques are used.
- Faster run: The processes that are most likely to be implemented are the ones that are currently manual processes, so the increase of speed will be evident.
- Security: Smart Contracts make use of encryption at the Blockchain level. This kind of technology is the most secure available.
- Lower cost: There are no intermediaries or cost fees during the execution process.
- Accuracy: There is no human intervention during the execution process. The whole transaction is less error prone.
- No execution risk: The process runs in a decentralized architecture supported by the network nodes rather than a centralized party.
All these advantages make a Smart Contract a completely trustworthy tool, providing full confidence in the results by making use of it.
What would be practical examples of Smart Contracts?
This technology could have a huge impact on many companies, such as financial services organizations, where fraud is one of the main issues. Here, the need for lawyers or any kind of intermediaries can be removed by using Smart Contracts to make agreements among the parties. This will reduce costs and will make contracts more secure.
Mortgage is another area that can benefit from this technology. In this case, arrangement among parties and all attributes of a mortgage can be applied from a Smart Contract, again removing the intermediary and reducing costs.
Moreover, the supply chain can be more transparent. Smart Contracts can make the tracking of any package in a completely accurate and automatic way at a given time. Combined with IoT devices, there is a huge space for improvement in logistics.
Digital identity, financial information, contact information, and many other personal data are being collected by different organizations at the same time. However, this duplication of the data may not be convenient for these entities, as it would be far more practical if this data is just collected once and then reused. Smart Contracts can solve this problem by centralizing all this information in just one place. Any change can be updated at the Blockchain immediately so the data is always accurate and easily accessed. This will facilitate a mechanism for identifying individuals in any organization that will eventually require it.
In the insurance sector, IoT devices will be able to provide accurate details of any claim, thus Blockchain-stored data will be available to allow for an immediate response, as well as an automatic approval of the payment.
Authorship and intellectual rights can also benefit from Smart Contracts. Registering an intellectual work in the Blockchain will ensure the authorship and will allow the author to get usage refunds automatically.
In the healthcare system, patient clinical histories can be stored in the Blockchain, along with past and current pharmaceutical prescriptions. This makes the information decentralized from hospitals or any organization, and it can be checked on the fly by insurance companies to make any required payments.
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What is the status of Smart Contracts?
This is just a small picture of the vast array of subjects that Smart Contracts can be applied to. There are roughly no limits on the scope of implementation for this technology. We can also mention, in these times of the worldwide pandemic, that there are current research and projects aimed to improve the management of the statistical data from all over the world, along with the track of relevant individuals’ information, thus speeding up the treatment process in order to cope with Covid-19 using Smart Contracts.
There is still a lot of road to be driven on the path of Smart Contracts. Wide adoption will take place sooner than later, and advances in scalability, latency, flexibility, and privacy will benefit them. These subjects are currently under constant development, and we will be able to see lots of improvements and opportunities in the near future.
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