Smart Contracts: Reasons Why They Are So Important For Business
Blockchain technology is transforming the way we do business, and its commercial value will grow even more over the next two decades.
More and more companies are implementing this technology in their processes, and one of the most widespread applications is smart contracts. Here we explain what they are, how they work, and why they are becoming indispensable in companies.
What are Smart Contracts?
A smart contract is an agreement based on blockchain technology that is automatically executed once certain pre-programmed conditions are met. Its objective is to simplify business and eliminate intermediaries, thus saving costs.
To understand what they consist of, we have to start with the definition of a traditional contract: an agreement between two or more parties defining what can be done, how, and what happens if something is not done. In short, the rules of the game facilitate the understanding by all parties of what the interaction between them will consist of. They are subject to laws and territorial jurisdictions and usually require notaries, which means higher costs, time, and third parties involved in the process.
Smart contracts, however, can execute and enforce themselves autonomously and automatically without mediators. They are scripts written in a valid, decentralized, immutable, and transparent programming language without relying on authorities.
How Smart Contracts Work
Smart contracts follow simple “If/when… then…” statements written in code on a blockchain. A network of computers executes actions when predetermined conditions have been met and verified. These actions could relate to releasing funds, registering a property, issuing a fine, etc.
The blockchain is updated when the transaction is completed; therefore, it is no longer possible to change it, and only parties with permission can see the results. Within a smart contract, there can be as many stipulations as necessary, and, to set the terms, participants must determine how transactions and their data are represented on the chain, agree on the rules governing those transactions, explore possible exceptions, and define a framework for resolving disputes.
Once all this is stipulated, a developer can program the contract.
What is the problem solved by Smart Contracts?
Companies, regardless of size or industry, are surrounded by written contracts. Unfortunately, these are often cumbersome and a source of commercial and legal disputes.
Therefore, the most effective solution to traditional contracts is smart contracts. They simplify business and commerce between anonymous, identified parties, usually without the need for an intermediary. They also reduce the formality and costs associated with traditional methods while preserving credibility, security, and authenticity.
But these are not the only advantages, as they provide many more:
- They bring greater security thanks because they are based on blockchain technology, and ledgers are impregnable and immune to alterations.
- They eliminate dependence on intermediaries and give greater freedom to the parties to make agreements.
- They are executed in near real-time, occurring simultaneously for all parties once the necessary criteria are met.
- They create an environment of trust and transparency where all participants see the contract information on the blockchain.
As they are distributed across thousands of computers, they avoid being held in custody by a large company, which eliminates bureaucracy, censorship, or the large costs/time involved in this process.
Smart Contracts: Examples
Smart contracts first came to public attention thanks to Nick Szabo, a lawyer, and cryptographer, who mentioned them in a paper in 1995. Two years later, he developed a more detailed paper defining the theory, although, at that time, it was impossible to make it a reality with the existing technological infrastructure. It would take almost 15 years, in 2009, for them to become a reality with the emergence of blockchain technology and bitcoin.
Smart contract solutions can be applied in numerous industries and processes, for example, in the pharmaceutical sector. Sonoco and IBM are using these contracts to reduce problems during the transportation of medicines through a platform that tracks temperature-controlled products throughout the supply chain to provide reliable and accurate data between the parties involved in the process.
In the retail sector, The Home Depot uses smart contracts to quickly resolve supplier disputes, thanks to a real-time communication process and greater supply chain visibility. They are achieving stronger relationships with suppliers and a greater ability to spend this time on critical innovation and work.
International trade is also a major beneficiary today, as smart contracts and blockchain can define standardized rules and simplify trade options to reduce friction and expand trade opportunities for participating companies and banks.
Why Should Companies Consider Implementing Smart Contracts?
Smart contracts have the potential to radically change industries such as art, retail, supply chain, industry, telecommunications, and others by speeding up transactions, reducing paperwork, and generating profitability.
In the financial space, they have grown from $500 million to more than $20 billion by 2020, and these are just initial figures.
Smart contracts solve the problem of trust in the digital world and make it more honest, secure, and fair. They introduce protocols into your business that ensure the integrity of multi-party agreements and automatically enforce fixed obligations, such as loan and intellectual property applications, validate insurance eligibility, establish decentralized autonomous organizations, etc.
If you are thinking of implementing smart contracts in your business, Plain Concepts can help you find the best solution.