What is a Smart Contract?
Rapidly developing Blockchain technology is immensely influencing the financial world and now we can already witness the rise of a new economy – the crypto-economy. However, Blockchain advancements are not limited only to finance. Blockchain developers have recently come up with a new Blockchain technology that is actively conquering the market and has already become highly popular among many businesses – Smart Contracts.
Blockchain Smart Contracts are a disrupting technology for legal institutions. It allows businesses to exclude third parties from the creation of agreements and improve their inner paper flows. In this article, we’ll look into what Blockchain Smart Contracts are, their benefits, and how companies are already applying this technology for their successful development.
The Notion of Smart Contract
Smart Contracts run on Blockchain technology. They can be used as real-life contracts for concluding agreements for various businesses.
The key advantage of Smart Contracts is that they don’t require any middlemen like lawyers or legal representatives to enforce any negotiation. Contract participants can create Smart Contracts on their own and get executed automatically once included conditions are met. This way, contractors can save much time and money when they rent apartments, exchange money, register vehicles, or even hold presidential elections.
There is a wide range of cases when Smart Contracts can be applied and many companies already do. For example, Slock.it helps its users to automate sharing, payments, and rentals with Smart Contracts. Fizzy AXA uses Blockchain to automate flight insurance compensations. Populous alleviates buying and selling outstanding invoices using Smart Contracts, and many others.
Blockchain Smart Contracts have shifted from a theory to daily practice for many companies long ago and their popularity is only growing. According to the Global Opportunity Analysis and Industry Forecast, 2021-2026 report, the global market size of Smart Contracts is forecasted to hit the mark of $345.4 million by 2026, from $106.7 million in 2019, at a CAGR of 18.1%.
How Do Blockchain Smart Contracts Work?
Two main concepts form the basis of Smart Contracts – logical patterns and Blockchain.
All Smart Contracts follow the same logical pattern — “if/when…then…” statements. These statements describe the conditions when contracts get executed. For example, if the buyer confirms with a receipt that the goods are delivered, then the Smart Contract releases and transfers the money to the seller.
Smart Contracts can contain simple statements or a complex system of stipulations that should be completed to satisfy both sides of the contract. Therefore, each contracting party should participate in Smart Contract creation. They need to agree on the rules which fulfill transactions, carefully consider all the possible exceptions, and elaborate on the steps on resolving disputes.
Blockchain is the technology that supports Smart Contracts execution and ensures that it’s fair for both sides. It means that contract participants believe that the contract works according to the preset rules and nobody can change them or delete them from the system. It is possible due to the Blockchain features. It has a transparent and decentralized nature which allows the contract participants to track each agreement step execution and restore the contracts in case they’re lost by one of the sides.
Here are the 5 steps the contract participants need to take to put Blockchain Smart Contracts to action.
Benefits of Blockchain Smart Contracts
There are a variety of businesses from diverse niches that effectively use Blockchain Smart Contracts in their work. Why do they prefer this technology to addressing traditional legal institutions?
Here are the main benefits companies obtain from using Blockchain Smart Contract:
- Cost-effective – with Smart Contracts businesses save on notary processes, excluding any intermediaries from the contract conclusion. This way, they replace lawyers by automating many manual processes, reducing operational costs.
- Time-saving – using Smart Contracts businesses save up their time on traditional paperwork associated with finalizing all the agreements.
- Autonomous – Smart Contracts are executed automatically and don’t require any verifications from lawyers or notaries.
- Possibility to backup – Blockchain technology determines that each Smart Contract should be shared with each participant of the system. This way, it’s hardly ever possible to lose any contract or its data as they are duplicated many times over.
- Safe – once a Smart Contract is approved nobody can change its structure as it’s determined by the Blockchain specifics. It means that once any Blockchain participant changes the data in its blocks, it stops matching with the data of other members, resulting in errors.
- Accurate – Smart Contracts minimize the number of manual mistakes which can appear during the contract preparation. All the terms and conditions are put into Blockchain and never change.
Where Could Smart Contracts Be Used?
Smart Contracts are versatile technology that can be applied across diverse industries from insurance to healthcare services and more. Let’s have a closer look at some of the most prominent examples of Smart Contracts implementation.
In healthcare, Smart Contracts can be used in several ways. For example, healthcare institutions can archive patient data, making it immutable and accessible only to certain specialists. Besides that, some medical institutions use Smart Contracts to transport life-saving medications. They help to increase the transparency of medications supply chains and better control the conditions in which they are delivered.
Smart Contract technology has triggered the development of parametric insurance. This type of insurance is automatically paid when certain events happen. The events should be clearly defined and pre-agreed in the contract. For example, in case of bad weather conditions such as hurricanes or earthquakes, an insurance company can establish automatic payments of certain amounts.
Besides weather conditions, parametric insurance may be applied to the farming industry, financial markets in the condition of a volatile economic environment, technology failures, e.g. flight delays or self-driving car accidents, and many others.