With blockchain technology being on the rise, many companies are interested in blockchain-based solutions where smart contracts play a crucial role. Let’s figure out how smart contracts work and how industries can leverage them.
How do Smart Contracts Work?
To gain a complete understanding of how smart contracts work, it’s crucial to talk about blockchain. The technology is defined as a decentralized way of data storing and processing, similar to “a ledger that everyone keeps”.
Let us explain it in plain words by describing a simplified real-life example. Suppose there is a group of people that have to keep shared records about their activities. According to a traditional database, they need to have a leader to keep a ledger with records. Once you need any data, you have to turn to the leader. Thus, all the members have to trust the leader.
Compared to a centralized database mentioned above, the blockchain is “a ledger” kept by every blockchain member. Once the records are changed, the changes are applied in all the ledgers as well. With blockchain, you can hardly imagine a situation where someone could make changes without noticing them.
Why did the concept of smart contracts appear? That’s simple enough.
Bitcoins are about storing data about finances or other assets. Still, there are businesses with other kinds of assets. For example, let’s take one of the most popular use cases. supply chain management usually involves different organizations with their particular control methods. By applying blockchain technology, we can just keep financial records. Still, as far as supply chains are concerned, transactors also have to update many data based on specific terms to reach consensus. Thus, the question came up: how can each transactor be sure of the transaction’s integrity?
Ideally, they need to monitor the delivery process at each stage, but it would take much time and resources. However, you need to spend a lot of time on it. Many services save time, but they are centralized, which still doesn’t provide businesses trust when managing a supply chain. Blockchain brings more opportunities to track assets and their updates applied under specific terms.
Businesses perform various transactions with their assets, and they need to do it in some decentralized way. The first blockchain that provided such opportunities to businesses was Ethereum, which suggested a smart contract. The blockchain offers cryptocurrency, but you can also create your assets to track updates about them in a decentralized way. That is how businesses can leverage blockchain by using smart contracts.
Thus, smart contracts are self-executing code or a decentralized program that automatically implements the terms of an agreement between parties. A smart contract runs on the blockchain, and when data about the assets and their changes are received, the program checks if all the terms are met. Then the data is validated, the changes are applied to all the assets. What’s beneficial for businesses is that they don’t need to control execution, as a transaction is validated and automatically used on all the blockchain’s nodes.
What Are Smart Contracts’ Benefits for Businesses?
One of the most critical benefits smart contracts bring to businesses is the decentralized updating of assets. Any transaction is fulfilled and updated on all blockchain nodes, ensuring trust, immutability, and transparency. Let’s take a simple use case to explain this smart contract’s benefit. For example, a customer orders fruits or vegetables a supplier should keep under particular conditions. Still, customers can’t check 100% if the supplier strictly follows the terms of the agreement. With IoT sensors integrated and smart contracts incorporated in the delivery process, it becomes more transparent.
Another benefit of implementing smart contracts in your business is the reduced costs and resources you need to complete a transaction. For instance, to check how all the parties comply with the agreement terms, you might need to perform it physically, which incurs additional costs. In addition to the money saved, you save time as automation reduces time costs on the transaction execution.
Industry-specific smart contract use cases
These industry-specific smart contract use cases carry important lessons for businesses that might be interested in smart contract applications.
Logistics and Supply Chain Management
When buying any goods at the store, customers never know how fresh they are and if they are delivered according to the required standards. They just need to trust suppliers, as well as the store owners. With smart contracts, the whole process becomes more transparent as you can trace where the goods are and what conditions they are delivered. This use case of smart contracts can be applied not only for food products but any other goods, including oil, coal, etc.
Here are just a few benefits of smart contracts incorporated in supply chain management:
- Transparent tracking of items within the supply chain
- Reduction in verification
- Improved tracing results in fewer frauds and thefts
- Tracking of product location
- Automation of routine tasks and payments
- Financial data recording
Authorship and Intellectual Property Rights
Authorship and intellectual rights are often violated in the entertainment industry. Applying smart contracts is an excellent example of how to improve the situation. Based on blockchain, you can create a transparent registry of authorship. Thus, you are refunded each time automatically when someone downloads your product.
Healthcare and Insurance
It’s known that patient recruitment for clinical trials is quite a challenging procedure. There are multiple conditions and concerns from all the parties of an agreement, including sponsors, patients, and researchers. Smart contracts can help solve recruitment challenges and improve clinical trial management. The smart contract would allow automated checking and validation of candidates based on the required criteria and manage data sharing between institutions thanks to automation and privacy-preserving computations.
The real estate market would benefit from smart contracts by using them for property transactions without intermediaries. The decentralized registry of the property would allow clients to buy and sell real estate without intermediaries and pass ownership rights faster than traditional procedures.
With smart contracts, you can set up the conditions for transferring money. Let’s give a real-life example of the down-payment that is one of the conditions in the chain of events the buyer needs to fulfill. With smart contracts incorporated, there’s a system that coordinates the sale and purchase of a property. It can’t be manipulated, and all the conditions are fulfilled transparently. Once the down-payment is completed, all the parties would know it instantly, and the smart contract would regulate what happens next according to the agreement’s conditions.
Finances and Banking
Blockchain-based smart contracts can automate and simplify various financial operations and scenarios, bringing more transparency and trust for all parties.
Cross Border Payments
Without any doubt, blockchain-based smart contracts can bring efficiency and trust to international goods transfer initiated by trade payments based on a Letter of Credit. Smart contracts implemented can improve financial assets’ liquidity, which results in increasing of the suppliers, buyers, and institutions’ financial efficiencies. Properly incorporated in any industry, they would allow to avoid or solve disputes faster and better.
Another use case is related to trading. By implementing smart contracts, businesses can remove intermediaries or brokers from trading activities because their work is automated with blockchain-based smart contracts. They allow companies to reduce additional costs they used to spend on intermediaries. Moreover, there is no need to trust other parties to carry out a transaction.
While the future of blockchain-based looks very promising, and it is expected that many current business models will migrate to the blockchain in the future, it is still a young market. Though properly integrated, smart contracts can revolutionize many industries.
by Dmitry Lavrenov
Dmitry Lavrenov is a Blockchain Architect and Cryptographer at Coherent Solutions. With profound expertise in blockchain and cryptography, he is responsible for developing and adopting blockchain-based solutions in a vast number of industries. He also investigates and invents new approaches and solutions to solve problems like data control, data privacy, and secure storage.