So far you’ve probably heard about revolutionary blockchain technologies and their many advances in modern world, especially when it comes to digital currencies such as Bitcoin and Ether. Along with these, two words we hear more and more often are smart contracts – new and promising way to ‘seal the deal’ in a digital format.
Blockchain applications show many promises for future developments of the business, and along with improving existing businesses, they offer a new business models based on ‘smart’ technologies. One of the best advantages of smart contracts is the fact that their automated processes can save your time and money!
In order to understand how can this be done, let’s start with what these contracts are and how do they work;
What are smart contracts?
Smart contracts are computer protocols which are designed to digitally facilitate and enforce the performance of a traditional contract – well known concept of law enforced agreement between two or more parties used by businesses, governments and private persons.
Standard contract, as mentioned, is usually based on the terms of a relationship enforced by law, but a smart contract enforces a relationship based on a cryptographic code. Smart contracts are enabling us to make the feasible, credible and trackable transactions without interference of third parties required in conventional contracts, but also both save the time and costs of making and executing a traditional contract.
ALthough first time mentioned in mid-90’s, concept of a functional, ‘smart’ and digitally executed contract was actually introduced later, together with the emergence of blockchain technologies. Also called self-executing contracts or digital contracts, smart contracts have a format convertible to a code which is then stored on the system and supervised by the network of computers that run the blockchain.
How do they work?
To describe how smart contracts work, it’s easiest to compare them to vending machines which follow only the instructions given to them. Once it perform the instructions, contract is distributed and multiplied as many times as necessary and then executed by following the contract terms.
When speaking of network able to digitally transfer the values, Bitcoin was the first to support smart contracts, but it was limited to the currency use. With an introduction of open-source blockchain Ethereum and its more complex scripting language that support a broader instructions, concept of a smart contract has become more than a promising technology.
Ethereum smart contracts can manage agreements between users, provide utility to other contracts and store information about the certain application. It also enables the developers to create apps or agreements with an additional steps such as alternative transaction formats or a different ways to, for instance, transfer ownership.
Being faster, cheaper and above all more secure than traditional contracts, many companies, banks and even governments started to show the great interest to adopting and implementing this new technology into their systems.
How can smart contracts change the face of business?
Even though blockchain technologies are quite new and still quite expensive to develop due to the fact that, for now, only limited number of skilled developers work on it, they show many promises when it comes to use of the technology in the world of business. Blockchain technology is complex by its nature and requires an in-depth understanding of programming ways, but based on what we know so far, there is almost a limitless potential that smart contracts have in the business world:
- Huge potential of applying across different businesses :
Blockchain based technologies have a potential to make a big and revolutionary change in a way we do business by collecting, tracking and connecting all the data related to business process, including mediators and business partners. In the case of one party not complying with the terms of contract, there will be no need for intervention as smart contracts can automatically stop its execution and/or suspend any payment. This technology can, for instance, document the whole supply chain process as of day one – from movement and storage of raw materials to finished goods from point of origin to point of consumption.
This is a big step forward in ensuring the absolute transparency of the process, which was so far almost impossible to achieve. Along the way, this technology can also be used to detect different abuses of goods and/or labor force all of which can be well hidden due to the complexity of the supply chain processes.
- Ensuring security and protecting the infrastructure :
Smart contracts offer a way for management to track the activities inside the company and secure that nothing goes wrong from the very start of business process.
Storing data via protocols based on blockchain technologies improve the security of the company data. This way businesses can avoid and prevent any potential security breaches and threats from the outside and protect their confidential data.
- Saving money and time :
As smart contracts are made to increase efficiency and reliability and reduce costs, they will significantly reduce the need to engage different people into execution of the contract. Eliminating the human factor in smart contracts will not only reduce the costs of making the contract and the time of its execution but also there will be a fewer risks of manipulation, fraud and man-made mistakes.
- Huge potential of applying across different businesses :
Smart contracts also help to create completely new business models. For example, some companies such as Slock, an Ethereum enabled platform, are already using smart contracts to offer their customers completely new and automated way to rent, sell or share different real-world objects of their interest. This way, potential buyers and clients can rent a bicycle or AirBnB apartment by unlocking a smart lock once after both parties agreed on the terms of the contract.
By collecting and tracking the data, smart contracts, can change the existing business models and speed up the processes which usually take a lot of time, such as those related to insurance payments, loan requests and similar.