How smart are smart contracts really? Read on to find out!
At the fundamental level, a smart contract is a set of digital codes used to trade assets without intermediaries. Say you want to create a smart contract. In this case, you or the other party involved would have to digitally code the smart contract and its parameters, with both of you agreeing to the smart contract rules. Once all the details are finalized, the smart contract goes live and is stored in the immutable blockchain ledger, automatically executing the encoded action when conditions are met.
If the condition doesn’t meet what both of you agreed upon, the smart contract will execute based on other backup conditions provided within the code. With smart contracts, you wouldn’t need a middleman, like a lawyer or real estate agent, to make enforceable agreements with other people. It’s all code. So, what makes smart contracts so sought-after? Read on.
History of smart contracts
It may be surprising to hear that the idea of smart contracts was born decades ago in the mid-1990s. Nick Szabo, a computer scientist and cryptographer, dreamt of a computer protocol that could digitally facilitate, verify and enforce the performance of a contract without third-party participation. He famously viewed third parties as “security holes” that would be targets for hackers, criminals and oppressive states.
2009 witnessed the materialization of Bitcoin and its accompanying role as the blockchain base for smart contracts. While many tech teams across the world worked on introducing smart contracts to Bitcoin, the protocol could only be used to create very simple smart contracts. It wasn’t until 2015 that Ethereum was created with smart contracts in mind, advancing how they worked in the environment. From then, smart contracts proceeded to gain more widespread awareness. To this day, smart contracts remain the most efficient in the Ethereum ecosystem.
Smart contract advantages and challenges
Compared to traditional contracts, smart contracts offer some attractive benefits. For one, it is autonomous and secure. Smart contracts ensure a secure environment for executing contracts. Once a contract is live, it cannot then be modified without notice. Secondly, smart contracts can be executed in a matter of minutes compared to hours when it comes to real-world document-based contracts.
Despite the many benefits of smart contracts, companies have been relatively slow in transitioning towards smart contracts. This is mainly because blockchain technology isn’t mature, which poses some challenges:
1. Adoption curve and expenses
To implement smart contracts, businesses first need a decentralized ledger-based network, which takes time to adopt. Implementation of the system itself requires expertise and investment, and most businesses cannot immediately transition to using smart contracts.
2. Complex technology
Developers of smart contracts need to have coding aptitude and a deep understanding of the law side of the code for the contract. These two skill sets are not very commonly found together, and mastering one skill alone can take a long time. That’s why companies might feel discouraged to undertake building one given its complexity. Plus, there are many traditional alternatives that might suit them better.
3. Data privacy and regulatory landscape
Although blockchain’s immutable nature provides many benefits, some data privacy laws in different geographic regions across the world do not generally favor records that a system cannot forget.
Additionally, like most other contracts, smart contracts must also follow regulations in their local ecosystem or place. However, since the blockchain industry is relatively new, regulations are navigating a gray area. Business leaders and even regular people fear potential government regulations might require expensive or difficult changes in the future, which further decreases their likelihood to adopt blockchain-based systems, including smart contracts.
Are smart contracts useful?
Despite the challenges, many businesses have taken the plunge to adopt smart contracts, deciding that their many benefits outweigh their potential downsides. Some current uses of smart contracts include:
1. Cross-border payments
Smart contracts have revolutionized trade and finance. For instance, they have increased efficiency and reduced costs of international goods’ transfer and trade payment initiations involved in cross-border payments. Smart contracts also ensure security and retain a verifiable record of every transaction, reassuring payment systems.
2. Loans and mortgages
The traditional method of getting a mortgage involves an impressive amount of paperwork. Buyers need to verify numerous details, including income, assets and employment history, which can swamp underwriters. Blockchain simplifies the process by collecting all necessary documents and information into digitized records, accessible with a single click.
Additionally, smart contracts and blockchain technology eliminate the need for third parties during the settlement process, reducing costs in the final phase of mortgage loan processing. Buyers also don’t have to purchase title insurance, i.e. protection from any liens on the property, as blockchain makes it easy to verify a chain of title.
3. Government
In the public sector, smart contracts can simplify many arduous and costly transactions. It can be programed to manage student loan and grant applications, dispense loans and track compliance with terms and conditions. Its automated process allows real-time data access and increases transparency, compliance and security.
Smart contracts can also streamline tax collection and payment by matching tax data with income transactions and deductions. A blockchain-based system with coordinated automation brings efficiency, speed, and security to tax collection while minimizing potential loopholes.
4. Financial data recordings
Financial organizations can use smart contracts for accurate, transparent financial data recording, allowing for uniform financial data across organizations. This can drastically reduce audit costs and also improve financial reporting, which in turn will support increased market stability.
5. Many more
Smart contracts can be similarly used in many other industries, including supply chain management, insurance, escrow, trading activities and clinical trials. In all these industries, they tend to reduce costs while enhancing efficiency, verifiability and security.
All in all, it is easy to see why forward-looking companies are considering adopting the usage of smart contracts. The future will likely see smart contract revolutions in many industries, and it will be exciting to witness the increased convenience in many processes that are difficult today.
Also read:
- What Is a SMART Contract?
- Are Smart Contracts Safe? Top Risks to Keep In Mind
- What Are ERC Standards? Common ERC Standards You Need to Know About!
- Blockchain’s Public Access: Boon or Bane?
- Is Blockchain the Future of Real Estate?
- Blockchain in 2021 And Beyond
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