The idea of smart contracts predates the invention of Bitcoin in 2010. However, it was the launch of Ethereum in 2014, with the possibility of programmable blockchain logic, that brought the idea to life. Now this programmable logic — commonly referred to as “smart contracts” — is enabling blockchain technology across a multitude of use cases in different industry sectors.
Smart contracts can be defined as a paperless digital code that offers a set of promises on predefined conditions that the parties have agreed to.
In simple words, the parties can set a condition that can start an action or a series of actions when met.
Smart contracts can be used in a real-estate deal. Both the parties (buyer and seller) can create a smart contract that can automate the deal once the buyer pays the property value to the seller. To make all of these happen, the property first needs to be digitized on blockchain technology. Once done, both parties can carry their deal using smart contracts.
All smart contracts share some common properties.
· Because they exist on the blockchain, they have a state, like RAM in a computer does, and this state is shared across the entire network. So, each node running this blockchain has a copy of the state of the smart contract.
· They cannot be altered. Although there are ways to extend them or replace parts — if such action has been foreseen by the developers — there is no way to covertly manipulate their content without drawing the attention of the network.
· The logic of a smart contract cannot be distorted, so there is no room for interpretation. That is why they’re referred to as a “contract”. They act like an agreement between parties, but one which needs no judge, because the output is produced from the input deterministically.
Smart contracts gave us the opportunity to create any kind of token without having to launch an entirely new blockchain. With the emergence of Ethereum, a token became just a piece of code — a smart contract — with certain functions including enabling the “transfer” of digital assets and the ability to “read” the account content of token holders.
It is possible to create escrow agreements or futures, which are based on the occurrence of certain conditions in order to be released. For example, a smart contract could be programmed to release funds for someone’s birthday each year. It could also be programmed to release payment once someone confirms receipt of delivered goods. It could be used to enforce particular rights for holders of digital assets. Some of these ideas will be explored in a later section of this article covering applications of smart contracts.
Smart contracts refer to computer protocols that digitally facilitate the verification, control, or execution of an agreement. Smart contracts run on the blockchain platform, which will process all the transactions in a contract; hence, middle men are not required for executing the transactions.
Similar to traditional contracts, smart contracts define rules and penalties around an agreement and automatically enforce those obligations. While they can work independently, many smart contracts can also be implemented together.
The integral components of a smart contract are termed as objects. There are essentially three objects in a smart contract – the signatories, who are the parties involved in the smart contracts that use digital signatures to approve or disapprove the contractual terms; the subject of agreement or contract; and the specific terms.
Uses of Smart Contracts Smart contracts can be used in a variety of fields, from healthcare to supply chains to financial services. Some examples…
Digital Identity
One of the most obvious smart contract use cases is Digital Identity. Individual identity is one of the biggest assets for that individual. It contains reputation, data, and digital assets. The digital identity, if used rightly, can bring new opportunities to the person. Also, digital identity can also help protect the identity from counterparties and enable him to share it with companies that he intends.
For now, the internet allows you to connect to multiple services, but at the same time, unknowingly sharing your identity with the companies and they’re associated with having your identity mapped.
In this case, smart contracts can help counterparties learn about the individual without knowing their true identity or verify transactions. This frictionless KYC can help improve interoperability, resilience, and compliance — all with the use of smart contracts.
Government voting system
Smart contracts provide a secure environment making the voting system less susceptible to manipulation. Votes using smart contracts would be ledger-protected, which is extremely difficult to decode.
Moreover, smart contracts could increase the turnover of voters, which is historically low due to the inefficient system that requires voters to line up, show identity, and complete forms. Voting, when transferred online using smart contracts, can increase the number of participants in a voting system.
Healthcare
Blockchain can store the encoded health records of patients with a private key. Only specific individuals would be granted access to the records for privacy concerns. Similarly, research can be conducted confidentially and securely using smart contracts.
All hospital receipts of patients can be stored on the blockchain and automatically shared with insurance companies as proof of service. Moreover, the ledger can be used for different activities, such as managing supplies, supervising drugs, and regulation compliance.
Supply chain
Traditionally, supply chains suffer due to paper-based systems where forms pass through multiple channels to get approvals. The laborious process increases the risk of fraud and loss.
Blockchain can nullify such risks by delivering an accessible and secure digital version to parties involved in the chain. Smart contracts can be used for inventory management and the automation of payments and tasks.
Supply chain management is a great, blockchain smart contract use case. By using smart contracts, the supply chain can be improved manifold. For example, it can be used to track items within the supply chain with full visibility and transparency. A business can use smart-contract-powered supply chains and improve its inventory tracking to a granular level.
It also improves other aspects of the business, which are directly connected with the supply chain. Moreover, using smart contracts also means a reduction in verification, and enhanced tracing results in fewer frauds and thefts.
However, to make it work, the institutions need to add additional equipment, including sensors, to their supply chain. More so, it’s a smart contract application example.
Financial services
Smart contracts help in transforming traditional financial services in multiple ways. In the case of insurance claims, they perform error checking, routing, and transfer payments to the user if everything is found appropriate.
Financial data is very important for any organization. And, this is where the smart contracts come in. They provide the necessary way to data records for a more accurate and transparent financial data collection. With smart contracts, it is easy to manage the uniform recording of data across an organization resulting in reduced auditing costs and reporting.
Finally, it also results in reduced accounting costs and better interoperability among legacy networks and distributed ledger networks.
Loans and Mortgages
Smart contracts can also help improve financial services, including mortgages and loans. To do so, it can connect the parties and ensure that the whole process can be completed in a friction-less way. Moreover, it also provides an error-free process. For instance, the smart contract set up to handle a mortgage can manage it by tracking the payments and releasing the property when the whole loan is paid off.
One more benefit from using smart contracts in financial services is visibility to all the involved parties.
This use case also falls under the Ethereum smart contract use cases.
Insurance
Smart contracts offer significant potential across the insurance sector, in speeding up and streamlining the claims process. A simple example could be in the case of life insurance. The policy terms would be encoded into the smart contract. In the event of a passing, the notarized death certificate would be provided as the input trigger for the smart contract to release the payment to the named beneficiaries.
This can be extended across different types of insurance, providing that the insurer can find a suitable oracle for the input of external data in the event of a claim. For example, in the case of travel disruption, an insurer could use flight data provided by the airlines to serve as a smart contract trigger.
Insurance has always been one of the most use-cases of smart contracts. It is a known fact that most of the disputes happen in the insurance sector. For example, let’s take auto insurance as an example. Here, smart contracts can be used to settle the insurance as soon as possible.
To do so, smart contracts need to utilize a lot of technology, including Internet-of-Things, to facilitate themselves. The smart contract will facilitate the policy and make sure that it has all the proper documentation, including driver reports and driving records, with the use of the technology. If the smart contract is set up with the right policy, documents, and ways to capture data, it can execute itself shortly after the accident. Also, smart contract execution is only done based on the collected data, which ensures that no fraud is done in the process.
The insurance sector can genuinely take advantage of smart contracts and hence is one of the best smart contract use cases out there. More so, it’s a smart contract application example.
High Securities Another one of the useful smart contract real use cases include securities. With smart contracts, capitalization table management can be simplified and improved. This means that there are no intermediaries between the parties, including security custody chains. It can also be used for dividends, automatic payments, liability management, and stock splits.
Also, smart contracts can help reduce operational risk and make workflows digitized.
Escrow
The last use-case that we are going to discuss is escrow. Escrows are the process of storing value between the parties when the contract is still active. For this, the action is taken by the payer to release the funds. However, in the case of smart contract usage, it will be possible to automate the whole thing as soon as the service provider submits its work and authenticates it.
The smart contracts can be very useful for platforms such as Upwork or other freelancing platforms where the platform’s escrow amount is held. There are many companies using smart contracts for this purpose.
Mortgage System
Smart contracts can be effectively used in the mortgage system. It enables mortgages to be automated and ease both the owner and the buyer. To make all of these happen, smart contracts need to be coded according to the mortgage agreement. Once done, the smart contracts can be set into motion, and each step in the process can be automatically executed. The whole process is fast, cheap, and easy. This is one of the real world examples of smart contracts.
Cross Border Payments
Trade Finance can also be revolutionized with the help of smart contracts. There is no doubt that it can help in international goods transfer and trade payment initiations with the use of a Letter of Credit.
Clearly, using smart contracts will improve the liquidity of the financial assets, in return, improving the suppliers, buyers, and institutions’ financial efficiencies.
To make smart contracts work in Trade finance, especially in cross-border payments and international trade, it is necessary to find an industry standard and implement it accordingly. With proper integration, it can surely solve legal complications and offers a better way to solve disputes among parties.
Government
Smart contracts help automate. That’s where it can help the government to manage operations. One of those operations includes land title recording where the government can use to do property transfers.
Land Title Recording requires parties to transfer property with efficiency and transparency. Smart contracts can help do so. Also, using it will reduce auditing costs and also improve transparency within the whole system.
Another use-case for government, including electronic elections, the digital identity that we discussed earlier, and electronic record filing. Governments can explore more smart contract use cases based on their requirement.
Record Storage Smart contract database can be used to record information and also do digitization of real-world assets. You can use a smart contract database to store the records and renew them and release them according to the set parameters. All of these can be done automatically. This is one of the real world examples of smart contracts.
Trading Activities
Another use case of smart contracts in trade finance is trading activities. In this case, the middleman or broker is removed, and his work is automated with the smart contract. This removes the additional cost related to them. There are many companies using smart contracts for this purpose.
Clinical Trials Clinical trials can also improve with smart contracts as they can improve cross-institutional visibility. It can also automate the data sharing between institutions, thanks to the automation and privacy-preserving computations it can do. This is one of the real world examples of smart contracts.
Moreover, smart contracts can also be used to automate the trials and share the information across-industry. To be precise, it can help in identity, authorization, and authentication of the data.
In Conjunction With Other Tech
There are further benefits to be had by integrating blockchain and smart contracts with other technologies. For example, quality checks could be performed by artificial intelligence robots and then payments executed according to the outcome. Internet-of-Things (IoT) enabled smart containers could send data instructing a smart contract to hold back payment. This could happen, for example, if temperatures weren’t maintained throughout the transport of perishable goods, or if containers have been opened by an unauthorized individual.
Smart contracts incorporate critical tools for bookkeeping and eliminate the possibility of infiltration of accounting records. They also enable shareholders to take part in decision making in a transparent way. Also, they help in trade clearing, where the funds are transferred once the amounts of trade settlements are calculated.
Benefits of Smart Contracts
Autonomy and savings
Smart contracts do not need brokers or other intermediaries to confirm the agreement; thus, they eliminate the risk of manipulation by third parties. Moreover, the absence of intermediary in smart contracts results in cost savings.
Backup
All the documents stored on blockchain are duplicated multiple times; thus, originals can be restored in the event of any data loss.
Safety
Another aspect of smart contracts that makes them amazing is their security. It enables processes to work in a secure manner. The encryption also makes smart contracts work as intended. As smart contracts run on networks with immutable data, the data generated by them cannot be changed or altered in any way. This way, all information is kept secure. Smart contracts are encrypted, and cryptography keeps all the documents safe from infiltration.
Speed
The autonomous smart contracts executed way faster compared to the old fashioned traditional approach. Smart contracts automate tasks by using computer protocols, saving hours of various business processes. Smart contracts are interruption-free. This means that once they are started execution, they cannot be stopped or interrupted. As all the parameters are already defined within the smart contracts, it only needs to match them before it starts executing.
Accuracy
Using smart contracts results in the elimination of errors that occur due to manual filling of numerous forms. Smart contracts are error-free and accurate. The only issue is that they need to be coded correctly so that they execute error-free. For example, if you are filing your taxes, you can make errors while doing so. However, if you use a smart contract to do it for you, then it will be an error-free approach.
Trustless
The whole system is trustless. This means that there is no need to trust other parties. Sounds counter-intuitive? Well, in simple words, it means that there is no need to trust the parties to carry out a transaction. A transaction or a trade does not require trust as its integral part. As smart contracts run on a decentralized network, this means that the whole network is trustless.
Limitations of Smart Contracts
Difficult to change
Changing smart contract processes is almost impossible, any error in the code can be time-consuming and expensive to correct.
Possibility of loopholes
According to the concept of good faith, parties will deal fairly and not get benefits unethically from a contract. However, using smart contracts makes it difficult to ensure that the terms are met according to what was agreed upon.
Third party
Although smart contracts seek to eliminate third-party involvement, it is not possible to eliminate them. Third parties assume different roles from the ones they take in traditional contracts. For example, lawyers will not be needed to prepare individual contracts; however, they will be needed by developers to understand the terms to create codes for smart contracts.
Vague terms
Since contracts include terms that are not always understood, smart contracts are not always able to handle terms and conditions that are vague.
These are just a handful of examples. Smart contracts have opened up a world of possibility for the many use cases of blockchain that we see today. As the technology develops, it’s beyond doubt that smart contracts will become as much a part of our everyday lives as the internet.
Content compiled directly from these three sources:
https://101blockchains.com/smart-contract-use-cases/
https://medium.com/coreledger/what-are-smart-contracts-a-breakdown-for-beginners-92ac68ebdbeb
https://corporatefinanceinstitute.com/resources/knowledge/deals/smart-contracts/
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