Smart contracts resemble traditional contracts, except they’re written in computer code and don’t need human involvement to execute themselves. Imagine your business expected 100 smartphones but received only 60, and the order is closed. When you check the deal’s details on the wholesaler’s web portal, you see there were only 60 smartphones ordered and the rate card is overpriced. You struggle to find out how the order was changed. Suing the wholesaler takes money, effort, and time, and only the web portal management company and the wholesaler know of their under-the-table deal to fraudulently change the rate card in the database.
A similar scenario couldn’t be possible with a smart contract. Since every part involved in the business (the wholesaler, your company, the financing firm, and the logistics provider) must approve a proposal, or update, the rate per piece wouldn’t be changed in each participant’s database. Similarly, the transaction and Bitcoin transfer can be completed when the conditions are met and accepted.
When you use a digital contract stored on a blockchain for payments and want to determine what you do with the Bitcoin received, check the current Bitcoin price. It will give you an insight into whether you should cash it out using a broker exchange or hold it for a more significant profit in the bull market.
If you want to make business transactions more efficient and quicker, keep reading to understand more about smart contracts.
What’s with the hype around blockchain-based smart contracts?
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Blockchain technology generates interest across many industries, and leaders are looking for ways to tailor and customise it to meet the needs of their businesses and employees. Because it enables real-time transaction submission and monitoring, payments can be processed faster, removing the need for banks or other intermediaries and maintaining transparency and efficiency. The sender sends Bitcoin to the address generated by the blockchain, and the receiver uses the private key to access the funds. By providing trustworthy verification, blockchain makes transactions more accessible, fuelling the trend towards decentralisation as a way to solve business problems.
What are smart contracts?
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Smart contracts are digital documents designed to execute and enforce themselves automatically when specific criteria are met. The blockchain is all about trust, transparency, and security and can be used to sign agreements that no third party can alter, falsify, or change. This means that they can speed up the payment processing, as they’re not bogged down by bank interference or manual scrutinising.
Here are some reasons and benefits you’d gain from using smart contracts:
- Smart contracts use less paper and minimise register and notary work and transportation costs, decreasing pollution in the office and preventing fraud.
- Your contract is impossible to forge or alter as it is encrypted and stored in a decentralised autonomous organisation.
- Self-sufficiency. There’s no need for an intermediary when participants make their own arrangements.
Four smart contract use cases
- Source: blog.ipleaders.in
There are many potential use cases for smart contracts, and businesses in different sectors can take advantage of them depending on their specific needs. Here are four use cases and appealing features:
- Government operations. Smart contracts provide more transparency and efficiency by eliminating the need for manual intervention with specified procedures. Governments use them for property transfers as they improve the land title recording process. Smart contract automation also reduces audit costs and sees potential use cases in governments’ ability to use this technology in digital record filing, e-elections, and digital identity.
- With a private key, blockchain can store patients’ encoded health records. Only specific individuals could access them for privacy concerns, and research would be conducted securely and confidentially. All hospital receipts could be automatically shared with insurance companies as proof of service, and the ledger could be used to supervise drugs and manage supplies more effectively.
- Financial services. Smart contract automation has the potential to provide error-free operations and save business money by reducing the number of hours the staff spends on bookkeeping. They reduce audits and reporting by storing more complex data in one place. You can set up a mortgage-handling smart contract by monitoring payments and releasing liens when the mortgage is paid.
- Digital identification. An individual’s digital identity is crucial as it provides insights about their data, reputation and digital assets. Since data is often shared with other parties, maintaining privacy on the internet is tricky. Smart contracts can be used to verify someone’s identity, save time, and help organizations meet compliance standards.
- Supply chain management. Smart contracts can track products as they’re shipped, allowing for fewer errors in the supply chain, reducing fraud, and leading to increased transparency. Since information is updated in real-time, the supply chain can be optimised faster and more precisely.
Smart contract limitations
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As with any investment and tech advance, while smart contracts can provide undeniable benefits, they can also have limitations and come with risks. For example, since they’re part of consensus building and run on distributed infrastructure, they’re deterministic, meaning they can’t access any external information/service. This makes them rely on oracles that connect them with real-world data and take several forms: inbound or outbound and hardware or software.
Software oracles pull third-party data like financial asset prices or real-time flight statuses from the internet and are the most common. On the other hand, hardware oracle’s extract data from physical objects by using sensors. However, oracles are frequently from centralised points of origin, which minimises some of the benefits that smart contract automation offers through decentralisation.
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Here are some other areas of concern:
- According to the concept of good faith, participants don’t get unethical benefits from the contract and deal fairly. However, ensuring that the conditions are met according to what was agreed upon is challenging.
- Hard to change. Since changing smart contract processes is almost impossible, any mistake in the code would be expensive and time-consuming to correct.
- Vague terms. Since contracts include hard-to-understand terms, smart contracts can’t always handle vague terms and conditions.
Blockchain’s best use case is for individuals who make daily payments. Many people question their usefulness, but several benefits are apparent. Will you stay tuned to see where this technology is going and what updates it will suffer?