In 1994, Nick Szabo, a legal scholar and a cryptographer introduced a concept where he came to the conclusion that a self-executable contract can be constructed for any decentralized ledger, which, later on, was termed as a Smart Contract. These contracts can be coded and they have the ability to run on a blockchain. Ethereum is one of the most popular platforms for the creation of smart contracts with Stellar and other platforms joining in with their own spin on its implementation. In this segment, we are going to take a look at how these self-amending contracts work and in what use cases they can be used.
How do smart contracts work?
Let us take an example of a real estate sale to understand how smart contracts work. In the traditional scenario, the sale of property involves a lot of paperwork as well as communication with multiple parties. Not only this, but it also has a high chance of fraud. Sellers go through property dealers who are responsible for making the deal and handling all the documentation. These agents act as the middlemen in the process.
To make sure that there is no monetary dependence on the person who is selling the property, the property agencies create an escrow account that has the money from the deal. When the deal is completed, the seller will have to pay both the agency and the escrow account provider to get the money. This not only leads to an increase in the amount that the sellers are dishing out but also increases the risk at their end.
In such cases, the use of smart contracts can reduce the burden by increasing effectiveness. The smart contract work on condition-based principle, i.e. if-this-then-that. So, they make sure that both the monetary and all other conditions are met before transferring the money to the seller.
The smart contracts can also replace the use of escrow accounts. As the details of the money and the right of ownership are going to be stored in a distributed system. Both the parties can observe the money in real-time and this eliminates the change of fraud as on a blockchain, the entries are immutable.
Applications of smart contracts
Smart contracts can replace traditional contracts across many key industries. They have the potential to streamline processes even further than what digitization can achieve. Here are a few use cases of these coded contracts:
When we talk of insurance administration, the processing of claims usually takes a lot of time due to the lack of automation. This becomes an issue for the customer as they have time constraints for their money. On the company side of the things, they have to face issues like unwanted administrative costs, dissatisfied customers, and inefficiency.
By using smart contracts, payments can be processed automatically when certain conditions are met as per the client and company’s agreement. For example, in case of a vehicle accident, the user can claim the price of the parts that are covered under the insurance.
- Internet of Things
The IoT technology is being used to bring interconnectivity to everyday devices over the internet by using sensors. These devices can be connected to the blockchain to log all the activity on an immutable ledger.
For example, if we are shopping by using a combination of blockchain and IoT, smart contracts can make sure of the fact that the right products are delivered to the right person. The sensors that are involved in this process create their own nodes and through these nodes, the location and possession of these items can be traced.
- Mortgage-based loans
When a lender approves a mortgage-based loan, there are many checks that need to be carried. Details such as income of the mortgagee, credit score as well as outgoings etc. need to be processed in the finest details. This process is often carried on by third-party service providers which makes it cumbersome for both the lender and the loan applier.
Smart contracts not only eliminate these middlemen but also provide a common platform to store all the information that is accessible by all the parties involved in the process at all times.
- Employment Contract
When a contract is drafted and verified, it is very important that both the employer and the employee satisfy all the conditions that are listed in it. The use of smart contracts eliminate the need of trust between both the parties and also prove to be an effective dispute resolution mechanism for future issues.
- Supply Chain
Supply chain involves the transfer of goods from the starting to the finishing points. Efficient supply chain management is important for any company which is involved in trading/commerce. There are multiple entities that are involved in the whole process. Smart contracts can record ownership rights while the products are transferred through the supply chain. They can also help in tracking the movement of the final products. This can help in locating the packages that are lost in transit.
The prospects presented by the different applications of smart contracts are promising. We need to understand the fact that like every new technology, the process of development and adoption is gradual and continuous. While the idea is enticing and different stakeholders are trying to bring in their own take towards its application, the true potential of its use is still left to be seen.