Blockchain is revolutionizing the business world, and its commercial value is only expected to grow in the following years. Enterprises are increasingly implementing the technology in their operations, with smart contracts being one of its most common applications. Simply put, smart contracts are agreements between two parties executed automatically after meeting specific pre-programmed conditions. Their objective is to facilitate business processes and eliminate intermediaries, which ultimately helps reduce costs. In this blog, we discuss what smart contracts are and why businesses should implement them.
Understanding how smart contracts work
A smart contract is written in Solidity, a programming language, and runs on the Ethereum blockchain. Like traditional contracts, it includes simple if/when… then statements, only that, in this case, it is not created by using paper, but with a digital ledger. The computer network then executes actions such as releasing funds, or issuing a fine, once the conditions have been verified. When the transaction is made, the digital ledger is updated, meaning no one can make any changes to it, and only allowed parties can see the final result. Their importance can’t be overlooked, as thanks to them, the crypto community has succeeded in thriving as an ecosystem of interconnected blockchains. DeFi is probably among the most considerable developments enabled by smart contracts, having the potential to transform the financial industry.
What solutions do smart contracts bring?
Written contracts are necessary for every company, regardless of their size. However, these are often inconvenient and can lead to legal and commercial disputes. This is why smart contracts are a practical solution: they make business processes seamless, eliminating the need for intermediaries. Besides reducing middleman risk, the technology also saves resources for the business. For example, in the real estate sector, the fee for brokers, lawyers and others involved in the transaction can be costly, but with blockchain and smart contracts, this is no longer a problem.
Although they became more popular due to their association with blockchain and cryptocurrencies, smart contracts were used long before that. Nick Szabo, a computer scientist, first introduced them in 1994. He likened the technology to vending machines: just like they automate purchases without an intermediary like a clerk or shopkeeper, smart contracts automate transactions in the same way.
Smart contracts reduce the formality of traditional methods, providing credibility, authenticity and, most importantly, security. They are entirely distributed on the digital ledger, allowing nodes to protect the data from potential cyber threats. Speed is also a significant advantage of smart contracts; while in traditional scenarios, it can take months or years to complete a transaction, implementing a smart contract is the key to eliminating this inconvenience.
They work as multi-signature accounts, safeguarding a financial account. Suppose payment in increments is required for a particular contract over an extended period. In this case, through smart contracts, funds can be released whenever the transfer of cash flow is approved by some of the nodes. Moreover, smart contracts can link to other contracts, offering dimension and utility.
The applications of smart contracts in different industries
The efficiency of smart contracts makes them appealing to business owners who are increasingly realizing the versatility of this technology, thus implementing it as part of their processes. Let’s further take a look at the industries that are benefiting from the incredible features of smart contracts.
Real estate
The Internet has impacted the real estate market, as more and more people are now looking for properties online. Online resources charge fees for posting and transactions, which can be a significant inconvenience. However, using blockchain in the industry brings great opportunities, reducing the expenses associated with the searching and selling of a house. Moreover, property owners and buyers have the possibility to pay with crypto like Bitcoin and use the immutable ledger to encode their contracts.
Music
Smart contracts also make a difference in the music industry. Currently, streaming royalties make up most of the artists’ incomes. These royalty payments can be simplified through smart contracts, enabling the payment to be released to the musician whenever a fan streams their song. What’s more, artists can sell their songs and albums by transforming them into NFTs, which helps create a meaningful interaction between artists and fans.
Healthcare
The healthcare sector has always struggled to track patients’ health records. Luckily, smart contracts can change this by streamlining insurance trials and allowing clinics to share patients’ data easily. Due to the blockchain’s nature, the information on the ledger can’t be manipulated, adding increased privacy and confidentiality to personal health records. As for the health providers, the technology benefits them, too, because they can use blockchain to better manage care supplies, drugs, and test results.
Retail and e-commerce
Stores can improve their back-end processes by leveraging smart contracts. For instance, if you own a brick-and-mortar company, smart contracts can help automate tedious processes like contractor payments and payroll administration. Moreover, retailers can merge smart contracts with supply chain management techniques to ensure that logistics businesses make timely deliveries and use verifiably quality products. For instance, assigning a blockchain ID to a single inventory unit can help a venture improve its supply chain visibility. If the delivery were delayed, the smart contract would immediately ensure they receive a penalty.
Human resources
Blockchain is a new technology for industries like HR, but its potential is huge, as it can help simplify tiresome tasks, allowing HR professionals to work with individuals more directly. In recruitment, smart contracts could replace traditional contracts, facilitating access to benefits packages for new hires. This means that instead of implementing provisions manually (which can often lead to delays), a smart contract would ensure the benefits are implemented right at the end of the probation period. Moreover, smart contracts could also help HR departments automate administrative tasks such as payroll processing. Besides saving time, the application could also help reduce human error, ultimately decreasing business costs.
Conclusion
Smart contracts have huge potential, helping generate profitability by improving operations. This technology solves the trust problem in the digital space, making it more secure and honest. Given all the advantages they bring, it is easy to understand why more businesses are embracing smart contracts – their future outlook is promising, as they can improve not only enterprises but society as a whole.