Traditionally, most transactions around the world rely on a contractual agreement between two or more parties. Something as simple as buying a car to as complex as product development across multiple companies relies on contracts as a way to ensure business obligations are met and enforced. But it is far from simple, as anyone who has ever tried to buy a house can attest.
Governments, legal departments, banks, regulatory bodies, taxation offices, accountants and a whole host of various organisations are involved to make sure contracts are honoured and followed. But what if that whole cumbersome, time-consuming (and expensive) process could be automated?
That is the driving force behind the technology of smart contracts.
What are smart contracts?
Essentially, smart contracts are lines of code that are stored on a Blockchain. They automatically execute when predetermined terms and conditions are met. The advantage is that there is no need for a third party or intermediary to verify if both parties have fulfilled the conditions of the agreement. The whole process is digitally automated and carried out immediately, so there is no time delay due to manual handling or paper processing.
What does Blockchain have to do with them?
Blockchain is a shared digital ledger which records data like transactions and links them together, so the entire history of any changes to an asset is available to all authorised parties. Blockchain uses a shared consensus system where there is only one master version of the ledger. This record is encrypted and can only be accessed by authorised parties. Any changes made to the ledger will be recorded permanently with the history of every change being visible to all members on the Blockchain. This means that Blockchain records are completely transparent and secure,
This guarantee of ‘immutable’ data is what makes Blockchain technology so useful for smart contracts.
How doBlockchain smart contracts work?
Smart contracts give parties the freedom and convenience to securely conduct transactions anywhere in the world without any oversight from some central authority or intermediary agents. The built-in Blockchain encryption means the whole process is tamper-proof and automated.
No one has to worry if the other party will hold up their end of the bargain. If the conditions are satisfied, the process will execute the contract automatically. This technology could be a game changer for industries like banking, health, education, insurance, import and export trading.
Let’s illustrate this with an example: suppose you want to buy a car. With your digital identity on Blockchain, lenders can quickly make a decision about credit. They may even choose to automate the process using predefined conditions. If approved, a smart contract would be created between you, your bank, the car dealer and the lender. When all parties are agreed on the terms of the contract, the funds are released to the dealerand the lender is assigned the title of the car.Repayments are initiated as per the terms on the smart contract. The transfer of ownership will be permanently recorded on the Blockchain, unalterable and viewable by all participants.
What are the benefits of smart contracts?
The biggest benefits are speed and accuracy. Since the contracts are digital and automated, there is no physical paperwork and no need to spend time reconciling and correcting errors, entering data manually or waiting for delivery. Time savings and cost savings through automation are major incentives for smart contract adoption.
Since smart contracts are designed to be automatically executable and the record is authentic, no one needs to worry about the terms being altered or manipulated unethically.
Combined with Blockchain’s secure encryption, they are extremely difficult to hack, thus promising superior security and trust.
Falsifying records is also impossible, as the distributed ledger maintains permanent records of every alteration, traceable and visible to all participants. Automatic fulfilment of contract terms is also a huge incentive, as there is no action required by either party to execute the contract.
Enhancing healthcare confidentiality
The healthcare sector is notorious for poor data handling, record-tampering, intermediaries and insurance fraud. By using smart contracts for patient records, these issues can be reduced substantially. Patient records are extremely sensitive documents that are absolutely critical for proper medical diagnosis and treatment. They are also vulnerable to being used for exploitation, marketing or fraud. Smart contracts can digitise and encrypt patient records, limiting access to a select few parties, making sure patient histories remain secure and confidential.
Smart contracts can radically transform the way governments handle the taxation system. In most places in the world, salaried employees settle their taxes through their employers, who act as intermediaries by collecting and coordinating information. Smart contracts can fully automate the process. Employees can use their digital identities to enter their income details directly into e-government tax portals, which would be designed on a smart contract framework. The system would calculate the taxes due and automatically deduct the relevant amount from the employee’s account, thereby eliminating any need for an intermediary. This would mean a simpler, faster, cheaper and more transparent payroll taxation process.
Smart contracts can revolutionize the supply chain by creating a fraud-resistant and resilient supply chain tracking system that guarantees full transparency and provenance. Workflow approvals, transfers, authorisation, shipping manifests, order fulfilment and recordkeeping across borders are all areas that can be transformed with smart contracts. Removing the need for papers and stamps, a digitised supply chain powered by smart contracts would be much more efficient and cost-effective than traditional practices.
These are just some of the areas where smart contracts can bring massive change. It is clear that the future of electronic transactions and contracts is about to undergo a massive transformation. Gone are the days of third-party verification and middlemen. In the digital age of business, smart contracts will be the guarantors of trust, creating a whole new kind of commercial reality.