In January 2009, an anonymous person or group of persons created a decentralized currency called Bitcoin that used underlying blockchain technology. Bitcoin enabled secure peer-to-peer transactions without the need for a third party, such as a bank, to monitor them.
Who would have thought that in a matter of decades this technology would have given rise to even more revolutionary applications?
Fast forward to today, and smart contracts are the next big thing in the world of blockchain and not only. Due to the advantages that they offer, smart contracts are being applied in a variety of industries.
But what exactly are smart contracts and why are many companies turning to them? That is exactly what we will discuss in this article.
What are smart contracts?
A smart contract is a digital protocol that facilitates, verifies or enforces the negotiation or performance of a contract. To put it in simpler terms, smart contracts are computer programs that automatically execute the terms of a contract.
These contracts are stored on a blockchain, which is a distributed database that contains a growing list of records, called blocks. Each block is linked to the previous one and contains a timestamp and transaction data.
What differentiates smart contracts from the traditional contracts that we are used to is the fact that smart contracts are self-executing. This means that once the conditions of the contract are met, the smart contract will automatically execute the predetermined actions.
For example, let’s say that a company enters into a smart contract with a supplier to purchase 100 widgets. The smart contract will automatically place the order with the supplier and once the widgets are delivered, it will release the payment to the supplier.
This makes smart contracts a more efficient and secure way to conduct transactions.
How do smart contracts work?
The above example sounds great in theory, but how do smart contracts actually work?
To write a smart contract, a developer needs to use a programming language called Solidity. Once the smart contract is written, it is uploaded to the blockchain.
From there, it can be accessed by anyone who has an internet connection. The contract will be stored on a decentralized network of computers and will be tampered-proof.
Once the smart contract is uploaded, the parties need to sign it with their digital signatures. After that, the smart contract is considered binding and can be executed automatically.
Advantages of smart contracts
The above content gave you a good idea of what smart contracts are and how they work with a glimpse of their advantages, but smart contracts are much more than that. Let’s take a deeper look at the benefits that smart contracts can offer businesses.
One of the main advantages of smart contracts is that they are more secure than traditional contracts. Smart contracts are stored on a blockchain, which is a decentralized and tamper-proof network. This makes it impossible for someone to change or delete the smart contract.
In addition, smart contracts are executed automatically, which means that there is no room for human error.
Speed and efficiency
Another great advantage of smart contracts is that they are faster and more efficient than traditional contracts. With smart contracts, there is no need for a third party, such as a bank, to verify or execute the contract. This saves a lot of time and hassle.
Storage & Backup
Smart contracts record all data related to a transaction on the blockchain. This data is immutable, meaning it cannot be changed or deleted. This provides businesses with a secure way to store data related to their transactions. Since smart contracts are stored on a blockchain, they are also backed up on every node on the network. This makes smart contracts a secure and reliable way in case of data loss.
As we already mentioned, smart contracts are stored on a decentralized network. This means that anyone with an internet connection can see the smart contract. This transparency helps build trust between the parties involved in a smart contract, such as with customers and business partners.
Smart contract use cases
All these advantages make smart contracts a great tool for companies. Use cases can differ from industry to industry and company to company. So, let’s take a look at some of the most common smart contract use cases.
The importance of digital identity has been increasing in recent years and smart contracts can play a big role in this. Smart contracts can be used to store digital identity data, such as biometric data, in a secure and tamper-proof way.
This data can then be used for KYC (know your customer) processes or for authentication purposes.
Another great smart contract use case is automated billing. Smart contracts can be used to automate the invoicing process. This can save a lot of time, as businesses no longer need to send invoices manually.
In addition, smart contracts can also be used to automatically release payments once an invoice is paid. This makes the whole process more efficient and secure.
For example, a store that sells products online can use a smart contract to automatically send an invoice to the customer once the order is placed. The smart contract can also be configured to release the payment to the store once the invoice is paid.
Supply chain management
Smart contracts can be used to streamline supply chain management. For example, smart contracts can be used to track the movement of goods and to automatically trigger payments. This can help businesses save a lot of time and money.
Another common smart contract use case is asset management. Smart contracts can be used to store and track ownership of assets, such as land or property. This can help businesses save time and money on paperwork. It can also help prevent fraud.
Industries that can benefit
Now that we’ve seen some of the most common smart contract use cases, let’s take a look at which industries can benefit from smart contracts.
Smart contracts can be used in any industry where there is a need for secure and efficient contract management. However, smart contracts are particularly well suited for the following industries:
Banking and financial services – Smart contracts and blockchain technologies can disrupt the banking and financial services industry by providing a more secure and efficient way to manage contracts. For example, smart contracts can be used for KYC processes, automated billing, and asset management.
Insurance – Smart contracts are one of the greatest way for insurance companies to streamline their operations. Automating the claims process, for example, can help insurance companies save a lot of time and money.
Healthcare – Healthcare is becoming one of the most innovative industries when it comes to the adoption of new technologies. Smart contracts can help streamline many processes in the healthcare industry, from patient data management to claims processing.
Real Estate – When it comes to documents and records, the real estate industry is notoriously paper-heavy, creating some awkwardness for all parties involved in a transaction. Smart contracts can help streamline many of the processes involved in buying and selling property, from title transfers to mortgage approvals and rental agreements.
Supply Chain Management – In supply chain management, smart contracts can serve as a vital element by automatically recording the transfer of goods, ensuring that all operations are carried out as planned, obligations are met, and much of the paperwork is eliminated.
Government – Some may be surprised to hear that government agencies can also use smart contracts. However, many government services can be automated using smart contracts. For example, smart contracts can be used for identity management, land registration, and tax collection. All of this can help government agencies save time and money, and for citizens, it can mean more efficient and streamlined services that don’t cause as much frustration.
As we already understand, Smart contracts are important because they represent a new way of doing business that is more efficient and secure. They can be used to automate many processes, which can save time and money for businesses. In addition, smart contracts are based on blockchain technology, which is a secure and tamper-proof distributed ledger.
This makes them ideal for businesses that need to store and manage sensitive data. All of this makes smart contracts a very powerful tool that can be used in a variety of industries. If you think your business could benefit from smart contracts, then it’s definitely worth exploring further.
Looking for a way to streamline your business operations with smart contracts? Contact us today for a free consultation and we’ll be happy to help you get started.