As the blockchain is a decentralized system that exists between all permitted parties, one of the best things about it is that there’s no need to pay middlemen or intermediaries and it saves you conflict and time. Blockchains have their predicaments, but they are rated, undoubtedly, faster, economical, and more secure than conventional systems, which is why governments and banks are turning to them.
In 1994, a cryptographer and legal scholar, Nick Szabo discovered that the decentralized ledger could be applied for smart contracts, also referred to as self-executing contracts, digital contracts, or blockchain contracts. Contracts, in this format, could be transformed to computer code, saved and replicated on the system and overseen by the network of computers that operate the blockchain. This would also lead to ledger feedback such as transferring money and getting the service or product.
What is Smart Contracts?
Smart contracts expedite the exchange of money, shares, property, or anything of value in a conflict-free, transparent way while circumventing the services of an intermediary.
The best way to explain smart contracts is to liken the technology to a vending machine. Normally, you would go to a notary or a lawyer, pay them, and wait for your document to be ready. With smart contracts, you simply put a bitcoin into the vending machine (that is, ledger), and your driver’s license, escrow, or whatever falls into your account. More so, smart contracts blockchain not only create the rules and penalties regarding an agreement in the same way that a standard contract does, but also automatically execute those responsibilities.
As the 22-year-old programmer of Ethereum, Vitalik Buterin, described it at a latest DC Blockchain Summit, in a smart contract strategy, a currency or an asset is sent into a program, “and the program operates this code and at some point, it automatically confirms a condition, and it determines automatically whether the asset should be passed to one person or back to the other individual, or whether it should be refunded immediately to the person who transferred it or some combination thereof.” In the meantime, the decentralized ledger also saves and replicates the contract which gives it reliable security and immutability.
For instance, suppose you rent an apartment from someone. You can do this via the blockchain by paying in digital currencies. You receive a receipt which is held in your virtual contract with the owner; the person gives you the digital entry key which gets to you by a set date. The blockchain releases a refund if the key doesn’t come on time. If that person sends the key before the rental date, the function holds it delivering both the fee and key to you and the individual respectively when the specified date comes. You can expect a faultless delivery, as the system runs on the If-Then premise and is seen by hundreds of people. If you get the key, the owner is sure to be paid. You get the key if you send a certain amount in bitcoins. The document is automatically deleted after the time, and either of us cannot interfere the code without the other knowing since all participants are concurrently informed.
Once you know how to create smart contracts, you can apply smart contracts in all sort of situations that range from financial derivatives to crowdfunding agreements, property law, credit enforcement, financial services, insurance premiums, breach contracts, and legal processes.
Here’s How You Can Use Smart Contracts
Insiders confirm that it is pretty tough for our voting system to be rigged, but nevertheless, smart contracts would ease all anxieties by implementing an extremely more secure system. Votes that are ledger-protected would need to be decoded and need extreme computing power to reach. Nobody can produce that much computing power, so it would take God to hack the system! Secondly, smart contracts could lead to high voter turnout. Much of the passivity by people comes from a fumbling system that involves lining up, completing forms, and showing your identity. Using smart contracts, volunteers can convey voting online and millennials will turn out en masse to elect their Potus.
The blockchain not only presents a unique ledger as an authorization of trust, but also cuts possible confusions in communication and workflow because of its efficiency, automated system, and transparency. Ordinarily, business enterprises have to go through a back-and-forth, while expecting approvals and for internal or external matters to sort themselves out. A blockchain ledger cuts this out. It also shaves out errors that typically occur with independent processing, and that may cause settlement delays and costly lawsuits.
The Depository Trust & Clearing Corp. (DTCC), in 2015, used a blockchain ledger to concoct more than $1.5 quadrillion worth of securities, signifying 345 million transactions.
Smart contracts run on the If-Then premise so, according to Jeff Garzik’s words, “UPS can administer contracts that state, ‘If I get cash on delivery at this spot in an emerging, developing market, then this other [product], many, many links up the supply chain, will lead to a supplier producing a new item since the previous item was just delivered in that emerging market.’”
Most of the times, supply chains are thwarted by paper-based systems, where forms have to go through various channels for approval, which raises exposure to lose and fraud. The blockchain cancels this by implementing a secure, accessible digital version to all parties on the chain and automates payment and tasks.
Barclays Corporate Bank uses smart contracts to record a change of ownership and automatically assign payments to other financial establishments upon arrival
There’s no doubt that we’re growing to super-smart robots from sluggish pre-human vertebrates. Just picture a future where everything is automated. Google is achieving this with smartphones, smart cars, and even smart glasses. That’s where smart contracts are very beneficial. One example is the self-parking or self-autonomous vehicles, where smart contracts could execute a sort of ‘oracle’ that could identify who was at fault in a crash; the driver or the sensor, as well as other countless variables. With the help of smart contracts, a car insurance company could charge rates uniquely based on where, and under which, conditions clients are using their vehicles.
You can make more money via smart contracts. Generally, if you wanted to lease your apartment to someone, you’d need to pay an intermediary such as Craigslist or a newspaper to put out an advertisement and then again you’d need to pay someone to verify that the person followed through and paid rent. The ledger lowers your costs. All you do is encode your contract on the ledger after paying via bitcoin. You and everyone witnesses accomplish automatic accomplishment. Real estate agents, hard money lenders, brokers, and anyone concerned with the property game can benefit.
Personal health records could be encoded and filed on the blockchain with a private key which would give access only to particular people. The same approach could be used to guarantee that research is carried out via HIPAA laws (securely and confidentially). Receipts of surgeries could be saved on a blockchain and automatically transferred as proof-of-delivery to insurance providers. The ledger, also, could be utilized for overall healthcare management, like compliance with regulation, testing results, drugs supervision, and healthcare supplies management.
Smart Contracts Are Awesome!
Smart contract Benefits
Autonomy – You will solely make the agreement; there’s no need to depend on a broker, lawyer or other mediators to confirm. Incidentally, this also strikes out the risk of manipulation by a third party, since execution is handled automatically by the network, instead of one or more, probably biased, people who may blunder.
Trust – Your document records are encrypted on a decentralized ledger. There’s no way anybody can claim they lost it.
Backup – Picture if your bank misplaced your savings account. On the blockchain, every one of your associates has your back. Your documents are replicated many times over.
Safety – The encryption of websites, Cryptography, keeps your documents secure. There is no risk of hacking. In fact, it would take an unusually smart hacker to decipher the code and go through.
Speed – You’d generally have to spend a lot of time and paperwork to process documents manually. Smart contracts can save hours off a range of business processes, as it uses software code to automate tasks.
Savings – Smart contracts save you funds since they strike out the presence of a third party. For example, you would have to pay a lawyer to be present at your transaction.
Accuracy – Automated contracts are not only faster and affordable but also bypass the mistakes that come from manually filling out stacks of forms.
Here is how the owner of blockchain services Bloq, Jeff Garzik, defined smart contracts: “Smart contracts … ensure a very, very precise set of outcomes. There’s never any mistake and there’s never any call for a lawsuit.”
Current Smart Contracts Problems
Smart contracts not yet perfect. What if bugs infiltrate the code? Or how should governments monitor these contracts? Or, how would governments set taxes on these smart contracts? For instance, remember the rental illustration?
What happens if the owner of the sends the wrong code, or he sends the correct code, but the apartment is condemned (taken for public use without the owner’s permission) before the set date comes? If this were the regular contract, it could be rescinded in court, but the blockchain is a distinct situation. No matter what, the contract takes place. The list of difficulties facing this innovation goes on and on. Analysts are trying to resolve them, but these severe issues do discourage potential adopters from coming on.
And here’s to What the Future Holds for Smart Contracts
Part of the future of smart contracts is in solving these problems. For instance, in Cornell Tech, lawyers, who declare that smart contracts will be incorporated into everyday life, have committed themselves to researching these issues.
Actually, we’re stepping into a sci-fi screen when it comes to smart contracts. Search Compliance, an IT resource center suggests that smart contracts may cause changes in some sectors, such as law. In that case, lawyers will change from writing traditional contracts to creating standardized smart contract templates, comparable to the traditional standardized contracts that you’ll see on LegalZoom.
Other industries like accounting, credit firms, and dealer acquirers, may also apply smart contracts for tasks, such as risk evaluations and real-time auditing. The website, Blockchain Technologies discerns smart contracts blending into a combination of digital and paper content where contracts are verified through blockchain and confirmed by material copy.
Blockchains where smart contracts could be executed
- Bitcoin: Even though Bitcoin has limited ability for processing documents, it is excellent for processing Bitcoin transactions.
- Side Chains: This is another moniker for blockchains that operate adjacent to Bitcoin and provide more scope for executing contracts.
- NXT: NXT is a public blockchain network that comprises an insufficient variety of smart contracts templates. You cannot code your own; you have to work with what is provided.
- Ethereum: Ethereum is a public blockchain network and the most exceptional for coding and executing smart contracts. You can code whatever you want but would have to buy the ETH tokens to pay for computing power.
Regarding the potential of smart contracts itself, there’s no limit to the array of sectors it can change, from automobiles to real estate to law and healthcare. The list goes on and on. Says Gavin Wood, Ethereum CTO.