What are Smart Contracts?
Smart contracts are digital contracts with the terms of the contract written into the lines of code, an idea which was first put forth by Nick Szabo all the way back in 1994, long before the invention of blockchain. Such digital contracts ‘automate, verify, or enforce the negotiation or performance of a contract’, and they run on blockchain networks, which are decentralised and public in nature with no government interference and no hacking.
How Do Smart Contracts Work?
You need only simple ‘if/when…then…’ sentences that have been codified into the blockchain, actions that are executed only when certain conditions on the blockchain have been satisfied and verified and meet certain prearranged conditions. The action might be to release funds to the appropriate parties, to register a vehicle, send notifications, issue a ticket or update the blockchain to record a purchase or sale. You can see how there is little need for an intermediary, a middleman, to make all this happen, which reduces transaction times and enhances security.
Benefits of Using Smart Contracts
Efficiency and economies of scale are one of the biggest advantages of smart contracts. First, because they automate a process, they reduce manual efforts and therefore the time it takes to execute tasks. Similarly, if any manual effort is required, it reduces the cost of trade. They are also theoretically indestructible, unhackable and immune to fraud, since they are coded and distributed across the blockchain’s network. Because smart contracts are transparent, the terms of the contract are visible to all parties, so everyone can see at any time what is happening, and not when things have gone wrong.
Real-World Applications of Smart Contracts
Smart contracts are being used in different industries ranging from finance to supply chain management, to real estate. In the area of finance, these digital contracts automate payments and help improve the efficiency of clearing and settlements. In supply chain management, they are used to improve the transparency of the goods provenance and automate many tasks, such as inventory control, among others. In real estate, these contracts are used to automate several processes, from real estate sales, lease management, among others without the need for paper-based methods and expediting the process.
Challenges and Considerations
Smart contracts can be powerful, but they also have limitations. The reliability of a smart contract’s code, and its ability to be enforced, depends on the quality of the code right at the outset. Poor coding can result in slipups and vulnerabilities, which can lead to large losses. In addition, smart contracts currently vary in the extent to which they will be legally recognised and regulated as contracts in different jurisdictions. Furthermore, they currently do not have the ability to consider context or nuance in the same way that a mediator might act as a human interpreter.
Conclusion
Smart contracts are a valuable technology that enhances how we handle business transactions and ensure the enforcement of agreements. By removing friction from processes and reducing the need for intermediaries, they offer a cheaper, more efficient and secure way of conducting our business interactions with each other. Alongside their benefits come their own set of complexities, which should be managed carefully as the technology evolves and more industries begin to adopt it. And, as it does, we will expect to see more and more industries begin using it in ingenious new ways.
