One of the biggest challenges organizations are facing is the lack of trust while engaging with another party. Due to the lack of trust and transparency, organizations act cautiously and spend significant time and money on intermediaries while finalizing agreements.
Smart contracts can improve this by removing the intermediaries in cases when contract conditions can be observed publicly. These contracts build trust and transparency between two parties by using blockchain technology. They enable the creation of immutable and accessible contracts.
What is a smart contract?
Smart contracts can remove the need for a mediator when two parties want to exchange valuable digital or physical assets. It is an application of blockchain relying on a decentralized, immutable public ledger.
Smart contracts record contracts as computer code that contains the conditions of the contract. When all conditions are met, the contract is activated.
How does it work?
Working principle of smart contracts can be examined in five steps:
- Offer: The transaction process starts with an offer of the first party. The first party writes its terms in the form of an “if-then” statement, then places it into the blockchain.
- Negotiation: Terms are visible to any party on the blockchain so that two parties can negotiate on contract terms.
- Approval: Once two parties agree upon terms and triggering events such as due date, expiration date, strike price or other conditions, the contract becomes immutable and cannot be changed by any party.
- Satisfying Conditions: After each party approves the contract, smart contracts can self-verify the conditions that are placed inside a contract by interpreting real-time data.
- Transaction: When the triggering event occurs, the transfer of assets such as stock, real estate, information, intellectual property, and digital/nondigital funds happen.
Why is it important now?
Smart contracts are an emerging technology that can increase efficiency in various industries. As the technology matures, more organizations are expected to take advantage of it to reduce costs and enable fast and secure transactions.
Smart contracts market is expected to reach 300 USD Million by 2023 with 32% CAGR since it is
- Cost-effective: Smart contracts can replace agents that mediate agreements in cases where agreement terms can be observed publicly and digitally. For example, in legal processes that are dependent upon traditional torts, property, civil procedure, evidence or contract analysis, smart contracts can replace lawyers by automating manual processes.
- Time-Saving: Due to intermediaries and paperwork of traditional contracts, it takes time to finalize an agreement. Since smart contracts eliminate the need for intermediaries, they can be completed faster.
- Secure: Blockchain technology makes transactions more secure due to its decentralized structure. For instance, if hackers want to change the dollar amount in a transaction, they would need to control at least more than 50% of all computing power on the blockchain. Though the technology does not make the system unhackable, it certainly makes the process harder.
- Accurate: Since smart contracts are written as computer code, there will be fewer parties to make manual mistakes during the process of contract preparation.
What are the common use cases?
Industry-specific use cases
The global market for blockchain in insurance is expected to be $1.39 billion in 2023 with a compound annual growth rate of 85 percent. Smart contracts can improve insurance processes by automating claims when certain events occur. For example:
- AXA has launched an insurance product Fizzy that uses smart contract technology to deal with flight delay insurance claims. The smart contract is connected to global air traffic databases so that when an over two hours delay occurs, payment is automatically triggered.
- B3i is a startup providing insurance solutions on a blockchain platform offering opportunities for efficiency, growth, and quality across the value chain. They use smart contracts to validate conditions. If it is validated automatically determines the asset as a candidate.
Though smart contracts is a disruptive technology that has the potential to change the way insurers work, it’s not the only digital technology insurers are leveraging nowadays. For more on digital transformation in insurance, feel free to check our comprehensive article.
Supply Chain Management
Supply chain management is the management of the flow of goods and involves the active streamlining of a business’s supply-side activities. In a supply chain network, once an item reaches the final destinations, the ownership status of the item changes. With smart contracts, everyone in the supply chain can track the location of the item with the help of IoT sensors and smart contracts. If an item is lost during the process, smart contracts can detect its location. Smart contracts can also automate all the routine tasks and payments involved so organizations don’t need to send around large amounts of documents as everything is virtual.
A smart contract between a manufacturer and a retailer may include the following terms:
- The cost of manufacturing items,
- The time between receiving that order and shipping
- Penalty and bonus clauses
- Payment terms for compensating invoices
Financial Data Recording
Organizations can use smart contracts for accurate, transparent data recording while improving speed and security. A smart contract enables uniform financial data-keeping across organizations which eliminate the need to exchange other documents such as invoice images. It improves financial reporting and the integrity of data which supports increased market stability.
In healthcare, archival data of patients needs to automatically become immutable and accessible only to specific researchers. For example, Encrypgen uses smart contracts to transfer patients’ DNA data to researchers for clinical trial purposes. With genomic data, researchers find better treatments and cures for diseases by using the DNA data and various simulations. This blockchain solution combines DNA data and payment data on the blockchain, facilitating data access, payments and keeping record of parties that access a specific DNA data.
Common use cases
Smart contracts can ensure the royalties to the desired contributor by recording the ownership and other aspects of digital copyright assets such as digital ID or fingerprint on the blockchain.
Smart contracts can speed up the process of property ownership. Property ownership change contracts can be programmed and can be executed automatically. For example, once the buyer makes the payment to the seller, the smart contract can automatically change ownership of the asset based on the payment information on the blockchain.
A data marketplace is a platform where users buy or sell different types of data sets and data streams from several sources. There are some innovative data marketplace platforms that enable buyers to purchase data stream through an automated smart contract. Datapace and Ocean Protocol are example vendors.
What are the leading smart contract development companies?
- Coin Fabric
- Cyber Infrastructure Inc
- HashCash Consultants
- Leeway Hertz
- Quest Global Technologies
- Solulab Inc
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