Smart Contracts: Revolutionizing the Way We Do Business

Understanding Traditional Contracts

Imagine you want to rent a video game from your friend, after telling this to your friend you both come to an agreement or a contract that if you pay $5 to your friend then you can borrow the video game for a week.

Nice! But how would you exactly know that your friend will let you borrow the video game for a week after taking your money? And how will your friend know that you will give back the video game exactly after playing the game for a week?

In this case you both might need an unbiased third party to supervise your agreement, but this can be a little costly because whoever you rely on to supervise your agreement will also need a cut from the money for their time and effort to make sure that everything goes smoothly.

The above scenario is a traditional contract, in traditional contracts we often sign agreements when we deal with things like buying, renting, selling or more significant transactions like buying a property, getting insurance or taking out loans.

To make sure both parties keep their promises we often hire a third party (middleman) such as lawyers, banks or agents to oversee the agreement. Even though these middlemen provide security and trust for our contracts they usually charge high fees for their services, not to mention the amount of paperwork and several visits that you would have to make to arrange these agreements and get them done.

These things not only are costly and time consuming but also makes the process more complex. This is exactly where smart contracts come into play. Smart contracts eliminate all the traditional barriers we face when making agreements. When smart contracts are used, there are no middlemen instead we trust the technology that handles the contract. 

What is a Smart Contract?

Smart contract in simple terms is a type of application or program that executes the terms of a contract between two parties by making sure that no one can cheat on each other. The terms of the agreement are already written in the application code.

In the case of the above example, the smart contract is like a digital version of that video game rental agreement, so instead of both friends having to trust each other or rely on another friend to oversee the agreement for a modest fee, they both can trust the smart contract to ensure that everyone does what they promised.

Therefore, the smart contract itself acts as the middleman with no human involvement to act as a third party. Smart contracts work best with digital assets. With anything digital, smart contracts can easily control access, verify conditions and automatically carry out agreements without needing any third party. 

Understanding How Smart Contracts Work

Here’s how the video game rental agreement would work with a smart contract:

Step 1: Your friend uploads the video game to the smart contract application. The smart contract is now in full control of the game.

Step 2: You pay $5 to the smart contract; the smart contract confirms your payment.

Step 3: The smart contract transfers that money to your friend's account.

Step 4: The smart contract unlocks the game for you for 1 week.

Step 5: The smart contract locks the game when the rental period is over.

Step 6: The smart contract finally releases the game back to your friend’s account.

The above scenario is just a very simple example, actually in the real world, smart contracts can actually do much more than just enforcing agreements. They can handle complex logic, automate complex processes, eliminate the need for intermediaries providing transparency and efficiency in any industry be it health care, transportation, entertainment, finance and legal services.

In very simple terms smart contracts can actually make processes faster, cheaper and more transparent changing the way we do business. 

Where Do Smart Contracts Exist?

 

You might be thinking that since smart contracts are computer programs designed to enforce agreements, they could be developed in any digital platform, for example, social media platforms like Facebook and twitter, Media sharing platforms like YouTube and Spotify, service-oriented platforms like Uber and Airbnb, E-commerce platforms like Amazon and Ebay.

Theoretically the answer is yes but developing smart contracts in centralized or traditional applications are not genuine smart contracts, this is because centralized applications, like those operated by companies such as Facebook, are controlled by a single entity, therefore they do not provide the core principles a proper smart contract needs to function effectively.

So, building a smart contract in centralized apps is like signing a rental agreement where the landlord can change the terms whenever they want, making the contract unreliable.

That is why smart contracts are only built in blockchain, because only blockchain technology allows core principles like decentralization, immutability (tamper proof) and transparency for smart contracts to function properly.

For example, smart contracts built in decentralized blockchains means there is no central authority or a central server that controls the contract or its execution, instead the smart contract is run on many nodes (computers) in the blockchain. 

Immutability makes sure that no single entity can change the contract terms and conditions as they wish without the consensus of the network, ensuring security and trust. Likewise, only blockchain offers the essential features for a smart contract to function freely and effectively. 

Simple Analogy to Understand Smart Contracts and Blockchain

Think of blockchain like your memory, where you keep all your important experiences and information safe. This memory is well-organized and can't be changed, just like how blockchain securely records transactions. Now, smart contracts are like your brain's decision-making ability; they use the information stored in your memory to make choices and take actions.

It is your decision-making ability that decides what to do and what not to do based on the information you have. Together, your memory (blockchain) and decision-making ability (smart contracts) work as a strong team, helping you make smart decisions and get things done efficiently. Let me give you a very simple example to understand this too. 

Let’s say you’re planning to visit your friend tomorrow morning, but you set a few conditions for yourself:

1. If it rains, you’ll have to think twice about going.

2. If you wake up late, you might reconsider.

3. If both happen meaning rain and waking up late, then you’ll decide to skip the visit altogether.

The next day arrives, and when you wake up, you notice you're running a little late (this new info gets stored in your memory - kind of like how data gets recorded on the blockchain). But the weather’s nice and clear (another piece of new information added to the "blockchain"). Based on what you know now, you decide to go ahead with the visit (this decision-making process, where you act based on the conditions, is similar to how a smart contract works). 

Always remember that smart contracts analyze various information from the blockchain and are designed to automatically take actions when specific predefined conditions are met. Just as you decided to visit your friend’s house when conditions were in your favor. 

Nice! Now the question is from where does the blockchain get information? Simple!  It takes the information from oracles, oracles are systems that provide real world data like weather information, customers credit scores, live market prices of stocks or cryptocurrencies and any kind of real-world data and feed that data into blockchain, which smart contracts can then use to make decisions.

(Smart Contract icon by Icons8 , Cube Icon by icons8 , Blockchain Vectors by Vecteezy)

Real World Smart Contracts Use Cases & Examples

Real Estate Industry

This industry is currently bloated with third parties and time-consuming processes. But utilizing smart contracts can ensure that both sellers and buyers agree clearly on the terms and conditions such as how payments are going to be made and the proof of funds. This whole process can eliminate costly third parties. 

Example:

Propy, this is a platform that streamlines real estate transactions using blockchain technology. It lets buyers purchase properties with smart contracts that clearly outline the terms and execute automatically.

When the buyer and seller agree on a price, the smart contract takes over, ensuring funds are transferred only when ownership officially changes hands. This approach cuts out the middlemen, making the whole process faster and easier.

Insurance Industry

In the insurance sector, the use of smart contracts can really streamline the way policies and services work, reducing operational costs, thereby helping insurers to cut costs and potentially lowering premiums for customers.

With smart contracts, the claims payment process becomes automated, meaning policy holders can get their money faster than they would through the usual manual process. is this correct, premium means insurance coverage cost right.

Example:

Etherisc, this is a decentralized insurance platform that allows users to purchase various types of insurance such as flight delay insurance or crop insurance, directly through its dApp .(decentralized app).

Smart contracts automate the claims process, triggering payments automatically when the agreed-upon conditions are met, thus reducing the need for lengthy claims processing.

Supply chain management

Smart contracts in the supply chain management can be used to automate processes like tracking shipments, verifying where the products come from as it moves through global supply chains, handling payments and even calculating tariffs in real time.

Every step in the supply chain gets recorded in the blockchain, making everything traceable and impossible to tamper with. This helps companies avoid fraud, manage inventory more effectively, and ensure that suppliers and vendors meet their agreements before payments are automatically released. 

Example:

Vechain, one of the prominent blockchain platforms for supply chain management. Vechain uses multiple smart contracts enabling companies to track products in real time.

For example in the food and pharmaceutical industries, VeChain monitors environmental conditions (like temperature) and ensures that shipments meet compliance requirements. Payments can also be automated via smart contracts once delivery is confirmed.

Finance Industry

Smart contracts actually can turn the traditional way of how this industry works upside down! Everything like lending, borrowing, loan approvals, payments, savings accounts and investment management can be automated using smart contracts eliminating intermediaries like banks reducing transaction costs and processing times.

For example, with smart contracts, loan terms can be set in code, and once a borrower meets the criteria, the loan is automatically approved and provided. Similarly, cross-border payments become faster and cheaper since there’s no reliance on third-party verification.

Smart contracts also ensure transparency, as all transactions are recorded on a blockchain and can’t be altered. This automation improves security, cuts down paperwork, and increases operational efficiency.

Example:

Aave and compound, both are DeFi (Decentralized Finance) apps created to replace traditional banking activities. 

Perfect! Now you should have a good understanding about the difference between blockchain and smart contracts. Let’s have a look at the benefits and drawbacks of smart contracts.

Benefits of Smart Contracts

Automation and efficiency: Smart contracts execute tasks when predefined conditions are met, cutting out any intermediaries, thereby saving a lot of time and money. 

Security: Smart contracts and all the data are stored in blockchain, which is both decentralized and encrypted, making them almost impossible to hack or alter.

Accuracy: Since smart contracts are based on code and very heavily tested before launching, smart contracts eliminate human errors when setting up and enforcing agreements.

Transparency: Anyone can see the terms of the agreement and how it is executed. This helps to build trust.

Global Reach: Anyone with a computer and internet connection can access and use smart contracts.

Drawbacks of Smart Contracts

Hard to Change: Once a smart contract is launched, it is very hard to change it as no single entity controls it! This is good for security and trust but bad if a vulnerability or error is found. Fixing it would mean starting over a new contract again! 

 

Legal Uncertainty: Smart contracts do not still have any legal clarity. So, enforcing smart contracts can be super challenging particularly when it comes to cross jurisdictional issues.

Dependence on Oracles: Smart contracts rely on oracles (third-party services) to provide real-world data (like weather or stock prices). If the oracle feeds bad data, the contract could execute incorrectly.

Complicated to Write: Writing smart contracts requires serious coding skills. If the code isn’t written properly, it could cause big problems, from security flaws to financial losses. 

Lack of Flexibility: In traditional contracts people can often renegotiate and adjust based on unexpected situations, but this is not the case for smart contracts. Smart contracts follow the rules exactly as coded, with no room for adaptation.

Final Thoughts

I personally believe smart contracts will revolutionize the way how traditional contracts work almost entirely perhaps in the next decade. Smart contracts together with blockchain technology will play a huge role bringing automation, transparency and efficiency to almost any industry like real estate, finance, insurance, Entertainment, Retail and supply chain. Not to mention Artificial intelligence. 

The combination of AI and smart contracts could create a powerful ecosystem where intelligent decision-making meets automated execution. In industries like finance, healthcare, and supply chain management, this pairing could lead to more efficient and adaptive systems. 

Picture a world where cross border transactions, not only payments but also purchases of properties could be done in a matter of seconds! The future of technology will be both stunning and a little intimidating. 

"Technology is like a wild bull, you can choose to ride it or run from it. The real question is, what will you do about it? Here's a hint, Wall Street!"

~ BcCryptonian

Disclaimer: The contents of this article are for informational purposes only and are not financial advice. The views here are just the author’s opinions. The crypto market is volatile, so be sure to do your own research before investing.