In this article, we are sharing some smart contract ideas and usage areas of smart contracts. Smart contracts are revolutionary approaching to the blockchain. Let’s start with what is are smart contracts and why they build?
What is the Definition of Smart Contracts?
A smart contract is a type of contract that is self-executing, without the need for a separate transaction by the parties. The traditional example of a smart contract is a vending machine that dispenses a can of soda after the correct currency is entered. However, today smart contracts are built using blockchain technology and distributed ledger technology.
Nick Szabo’s definition – the first to define smart contracts – can be reduced to computer code generated to automatically execute contractual tasks upon the occurrence of a triggering event, or agreements where the execution process is automated, usually by a computer program.
In addition, the Chamber of Digital Commerce, the world’s most prominent trade association representing digital assets and blockchain, defines smart contracts as “a computer code that can automatically execute on specified functions upon the occurrence of a given condition or conditions”. Smart contracts are self-executing and self-enforcing computer code that is run by a computer, so the presence of artificial intelligence is not a requirement.
What is Blockchain Technology?
In terms of the formation and structure of smart contracts, blockchain technology has an important place within the scope of digital transformation in the legal field. Blockchain is defined as a distributed database where data between two parties can be recorded in an easy, protected, and permanent way, open to the parties and updated by the participants. Blockchain has a decentralized system, meaning that it does not have any governing authority or a single authority looking over the framework. Rather, a group of nodes maintain the network, making it decentralized.
In addition, the existence of an immutable data system is undoubtedly one of the most fundamental features of the blockchain system. An immutable network is one of the best examples of blockchain, which ensures that its technology remains intact. Each node in the system has a copy of the digital ledger. To add a transaction, each node needs to check its validity. If the majority thinks it is valid, it is added to the ledger.
This promotes transparency and makes it corruption-proof. So, without the permission of most nodes, no one can add any block of transactions to the ledger. Another fact that backs up the list of key blockchain features is that once transaction blocks are added to the ledger, no one can go back and change it. Therefore, no user on the network can edit, delete, or update it.
What is the Connection Between Smart Contracts and Cryptocurrencies?
There is no doubt that one of the most important reasons for the real rise of smart contracts is the rapid development of blockchain technology. This technology allows smart contracts to utilize their full potential for automation.
Fueling this technology, Bitcoin led to the creation of Ethereum, a more sophisticated blockchain platform that allows for more complex transactions (beyond money or Bitcoin transfers) Ethereum has developed its own coding language called “Solidity”. […] Blockchain technology shows how a network can be built so that once a transaction is set in motion, the network can autonomously produce outputs without the direct intervention of any party or any intermediary.
Not only does blockchain allow each transaction to be verified through nodes (computers in the chain) but contracting within a ‘block’ and sending it to each node makes execution automatic and in principle immutable. This allows for the ‘digitization of trust through the certainty of execution’ and the creation of efficiency through the ‘removal of intermediaries’ and the reduction of their cost’s transactions.
What are the Uses of Smart Contracts?
Since the smart contract originated with Ethereum, it is still widely used in the banking and finance sectors. However, Jerry Cuomo, vice president of blockchain technologies at IBM, believes that smart contracts can be used across the entire chain, from financial services to healthcare and insurance, and has stated that the areas where smart contracts are used are opening too many different sectors. Some examples are listed below.
Personal health records can be encoded and stored on the blockchain with a private key that will only give access to specific individuals. This is proof that blockchain technology is effective in protecting patient privacy and personal data.
On the other hand, surgery receipts can be stored on a blockchain and automatically sent to insurance providers as proof of delivery. Finally, the distributed ledger can be used for general healthcare management, such as auditing medicines, compliance with regulations, test results and management of healthcare supplies.
Supply Chain Applications
Supply chains are a separate business area that can benefit from smart contracts. Internet of Things (IoT) devices can be used throughout the supply chain to record every step a product takes. Smart contract supply chains have the potential to eliminate internal theft, as managers will be able to pinpoint the exact time and location of a missing product.
Additionally, in massive supply chains such as large warehouses, these smart contracts will allow managers to see real-time stock levels and the time it takes for products to move through the supply chain.
Managers can use this data to adjust stock levels, improve delivery times and develop new working practices. In fact, the information contained in these contracts has the potential to help identify peak supply periods and determine which products to stock at different times of the year.
Real Estate Sector
Since the blockchain infrastructure has a centralized structure, the ability to make transactions with smart contracts without the need for third parties eliminates the need for expensive services provided by lawyers and real estate agents.
The insurance industry spends tens of millions of dollars every year processing claims. Not only that, but it also loses millions of dollars to fraudulent claims. In addition to supporting the initial insurance policy, smart contracts can also help improve the claims processing process in many ways.
They can allow for error checks and determine payment amounts based on a set of criteria that consider the type of policy held by the person or organization. Once again, reduced processing times, a significant reduction in errors and cheaper costs are among the main benefits.
In addition, in the longer term, smart contracts can be used in conjunction with Internet of Things-enabled vehicles to allow ‘pay-as-you-go’ insurance policies and instant activation of claims after an accident. Information such as driver’s licenses, driving records, accident reports and policy details can be processed immediately to facilitate fast payments that benefit both parties.
What are the Advantages and Disadvantages of a Smart Contract?
- Automation: Since it is the parties who make the deal, there is no need to rely on a broker, lawyer, or other intermediary to approve it. Incidentally, this also eliminates the danger of manipulation by a third party, since the execution is managed automatically by the network, not by one or more possibly biased individuals who may be at fault.
- Costless: Significantly reduces the intermediate costs involved in drafting, pursuing, and finalizing a contract (notary, lawyer).
- Fast: Normally a lot of time and paperwork is required to process documents manually. Smart contracts use software code to automate tasks, thus reducing hours in various business processes.
- Secure: Documents are encrypted in immutable ledgers, which means that transactions are fixed and cannot change.
Despite the many advantages smart contracts offer, there are technical drawbacks that are a major obstacle to their widespread adoption.
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