Smart Contracts: Ethereum’s Solution to Automated Contract Executions
Smart contracts, the backbone of Ethereum’s technology stack, are making waves with real-world applications.
How do smart contracts work and how are they empowering blockchain adoption?
What Is a Smart Contract?
Smart contracts are formed between two parties on the Ethereum blockchain. These contracts are written in code and maintain the properties of the blockchain including transparency and immutability. Smart contracts also operate without the need for a third party. This trustless system not only saves time, but it also eliminates expensive fees often seen in real-world contracts.
How Are Terms Enforced and Executed in Smart Contracts?
As mentioned earlier, all of a smart contract’s terms are written in code. The code is automatically deployed when the defined conditions are triggered. Let’s look at an example of a smart contract in real estate to illustrate how they work.
James wants to buy Alex’s apartment using ETH. Let’s say the price of Alex’s apartment is worth 500 ETH. A smart contract is created on the Ethereum blockchain with the value of the property and other terms and conditions that the two have agreed upon.
When James sends Alex 500 ETH, the smart contract automatically executes the code to transfer the ownership of the apartment. James doesn’t have to worry about getting scammed, while Alex is assured that his apartment will only be sold if he receives the full payment as agreed to in the smart contract.
Without a smart contract, both parties would take a considerable amount of time just getting the contract drafted. Then, they would have to fork out extra money to pay lawyer fees, administrative costs, and other fees. Smart contracts avoid these unnecessary expenses since third-parties are not involved.
Smart contracts also guarantee watertight security due to their decentralized nature. Users maintain total ownership of their assets and no entity can manipulate their smart contracts, unlike in the real-world where contracts are authorized by central parties like banks and governments.
How Are Smart Contracts Used in the Real World?
1. Real Estate
The real estate industry presents a golden opportunity for blockchains to have an impact on the real world. Today, home buyers and sellers are expected to shell out 5–6% of their property valuation to agents. This, combined with issues like hefty admin costs, fraud, and rising listing fees, is not good for the growth of the industry.
Blockchains overcome these problems by connecting buyers and sellers directly via smart contracts. In short, property sales will be faster, cheaper, and more efficient due to fewer middlemen and reduced broker fees. The transparent nature of blockchains also helps overcome property fraud since all parties have their information recorded on public digital ledgers.
2. Healthcare
The healthcare industry is also riddled with middlemen and paperwork that inflate costs unnecessarily. This is a major concern considering the U.S. spends close to 20% of its GDP on healthcare alone. Organizations can alleviate this problem by using smart contracts to:
- Record, store, and access sensitive data (e.g. patient history)
- Expedite data exchange to reduce lengthy processes and paperwork
- Comply with health and data regulations by coding the rules into the system
Several notable blockchain startups in the healthcare industry include:
- Dentacoin
- Blockpharma
- BlockPill
3. Banking
Blockchains have been connected with finance ever since the release of the Bitcoin whitepaper in 2008. Ethereum takes this one step further by revolutionizing the financial industry through groundbreaking innovations like decentralized finance (DeFi) and stablecoins.
One area where Ethereum smart contracts can benefit the financial industry is in serving the unbanked and underbanked. Since smart contracts are digital, they can be used to facilitate transactions anywhere in the world with minimal costs. Expatriates, for instance, can send money to their families across the planet for less than a dollar — a huge difference compared to average international transfer fees of $20 to $35.
Expect Ethereum to unveil more innovative solutions in the finance space as Ethereum 2.0 edges closer to its first phase launch.
4. Supply Chain Management
Supply chain management is a billion-dollar industry, but it’s not without faults. Companies are still struggling to track packages with full transparency. Organizations that ship and source globally are prone to common supply chain problems including high costs, shipping delays, and the worst of all, poor traceability.
Smart contracts can be used to track supply chains from end to end with complete transparency. In fact, the World Economic Forum (WEF) identifies blockchains as an ideal solution to overcome global supply chain challenges, particularly in tough times like the COVID-19 crisis.
Corporations like Maersk and Walmart are already using the blockchain to assist their supply chain management. Keep an eye out on this space as Ethereum develops further in the coming years.
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