Smart contracts are self-executing, business automation applications that run on a decentralized network such as blockchain. And because they’re able to remove administrative overhead, smart contracts are one of the most attractive features associated with blockchain technology. While blockchain acts as a kind of database, confirming that transactions have taken place, smart contracts execute pre-determined conditions; think about a smart contract as a computer executing on “if/then,” or conditional, programming.
Understanding Tokens and Smart Contracts
An insurance company could use smart contracts to automate the release of claim money based on events such as large-scale floods, hurricanes or droughts. Or, once a cargo shipment reaches a port of entry and IoT sensors inside the container confirm the contents have been unopened and remained stored properly throughout the journey, someone can automatically issue a bill of lading.
Smart contracts are also the basis for the transference of cryptocurrency and digital tokens (a digital representation of a physical asset or utility). For example, Ethereum blockchain’s ERC-20 and ERC-721 tokens are themselves smart contracts.
But not all smart contracts are tokens, according to Martha Bennett, a principal analyst at Forrester Research. “You can have smart contracts running on Ethereum that trigger an action based on a condition without an ERC-20 or ERC-721 token involved,” she said.
Smart contracts can govern the transference of other cryptocurrencies, such as bitcoin.
How Smart Contracts Mimic Business Rules
Smart contracts are neither really “smart” nor contracts in the legal sense. They’re only business rules translated into software.
People often ask what makes smart contracts different from business rules, automation software or stored procedures. Smart contracts can support automating processes that stretch across corporate boundaries, involving multiple organizations; existing ways of automating business rules can’t do that.
Because smart contract code is running atop an open blockchain ledger, rules can be applied not only within the corporation that coded the smart contract but to other business partners permitted to be on the blockchain.
How Smart Contracts Work
Smart contracts work by following simple “if/when… then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified. These actions could include releasing funds to the parties, registering a vehicle, sending notifications, or issuing a ticket. Someone then updates the blockchain when the transaction is completed. That means the transaction cannot be changed, and only parties who have been granted permission can see the results.
Within a smart contract, there can be as many stipulations as needed to satisfy the participants that the task will be completed satisfactorily. To establish the terms, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when...then…” rules that govern those transactions, explore all exceptions, and define a framework for resolving disputes.
Benefits of Smart Contracts
Speed, efficiency and accuracy
Once a condition is met, it is executed immediately after the contract. Because smart contracts are digital and automated, there’s no paperwork to process, and no time spent reconciling errors that often result from manually filling in documents.
Trust and transparency
Because there’s no third party involved, and because encrypted records of transactions are shared across participants, there’s no need to question whether it has altered information for personal benefit.
Security
Blockchain transaction records are encrypted, which makes them very hard to hack. Because each record is connected to the previous and subsequent records on a distributed ledger, hackers would have to alter the entire chain to change a single record.
Savings
Smart contracts remove the need for intermediaries to handle transactions and, by extension, their associated time delays and fees.
Uses of Smart Contracts
You can use smart contracts in a variety of fields, from healthcare to supply chain to financial services. Some examples are:
Government voting system
Smart contracts provide a secure environment, making the voting system less susceptible to manipulation. Votes using smart contracts would be ledger-protected, which is extremely difficult to decode.
Smart contracts could increase the turnover of voters, which is historically low because of the inefficient system that requires voters to line up, show identity, and complete forms. Voting, when transferred online using smart contracts, can increase the number of participants in a voting system.
Healthcare
Blockchain can store the encoded health records of patients with a private key. Only specific individuals would be granted access to the records for privacy concerns. Similarly, research can be conducted confidentially and securely using smart contracts.
All hospital receipts of patients can be stored on the blockchain and automatically shared with insurance companies as proof of service. The ledger can be used for different activities, such as managing supplies, supervising drugs, and regulating compliance.
Supply chain
Traditionally, supply chains suffer due to paper-based systems where forms pass through multiple channels to get approvals. The laborious process increases the risk of fraud and loss.
Blockchain can nullify such risks by delivering an accessible and secure digital version to parties involved in the chain. You can use smart contracts for inventory management and the automation of payments and tasks.
Financial services
Smart contracts help in transforming traditional financial services in multiple ways. With insurance claims, they perform error checking, routing, and transfer payments to the user if everything is found appropriate.
Smart contracts incorporate critical tools for bookkeeping and eliminate the possibility of infiltration of accounting records. They also enable shareholders to take part in decision making transparently. Also, they help in trade clearing, where the funds are transferred once the amounts of trade settlements are calculated.
NFTs and smart contracts: Blockchain technology in gaming
The global gaming industry is a hundred-billion dollar ecosystem that continues to skyrocket, but the way value is created and distributed throughout the industry can be inequitable. Developers make and release games, and players pay to play and interact with those games. This perpetuates a one-directional flow of value where players spend money to unlock access to in-game assets and gameplay configurations. In contrast, blockchain technology in gaming can enable players to capture the utility and value of in-game purchases and asset acquisitions more effectively.
Non-fungible tokens (NFTs) — unique digital assets that represent in-game content commonly driven blockchain technology in gaming. NFTs rely on smart contracts. These tokens are unique, rare, and indivisible, while the blockchain networks that underpin NFTs facilitate player ownership, provable scarcity, interoperability, and immutability. Together, these characteristics of blockchain in gaming have the potential to drive mainstream adoption and a more fair value model.
Blockchain in real estate
Through tokenization, smart contracts are advancing the fractional ownership of assets and thus lowering the barrier to entry for investment for many by merging blockchain and real estate transactions. In particular, there have been several successful endeavours in tokenizing real estate assets, including via platforms like RealT and SolidBlock that fuse blockchain and real estate. Smart contract technology can also rework the documentation and transaction processes by incorporating blockchain into real estate transactions. For example, the Republic of Georgia (in the Caucasus region) has been developing a blockchain-based land title registry since 2016, and similar projects are underway in other jurisdictions such as the United Arab Emirates (UAE).
Conclusion
The rise of edge computing is critical in scaling up tech deployments, owing to reduced capacity requirements, faster application response times and improvements in data security, according to Juniper Research. Blockchain experts from IEEE believe that when blockchain and IoT are combined, they could transform vertical industries.
While financial services and insurance companies are currently at the forefront of blockchain development and deployment, transportation, government and utilities sectors are now engaging more, because of the heavy focus on process efficiency, supply chain and logistics opportunities. And that’s expected to combine to make smart contracts more ubiquitous in the years ahead.
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