Smart Contracts : The Blockchain technology that will substitute Lawyers and Middlemen
It’s 2021 — even those who are not familiar with blockchain are likely to have heard of Ethereum. Ethereum is the second-largest cryptocurrency with a huge market cap of over $378.71 billion. To fully understand Ethereum blockchain, one should properly understand what is a smart contract.
Smart Contracts are a self-executable computer program code that will execute the contract when the pre-defined conditions are fulfilled. It is a contract that is coded into computer algorithms, where the terms and conditions of the contract are written in a series of ‘if and then’ code functions. When the stakeholders involved in the contract fulfill the pre-defined terms of business, the smart contract will initiate itself to execute the transaction.
Many industry leaders and tech giants have been exploring the use cases of smart contracts and implementing them to enhance their business models. Enterprises need a solution to cut down the substantial fees they spend on regulating & securing the transactions. Smart contracts provide the exact solution. They emerged as the most trusted & direct form of agreements between people and organizations without involving third-party intermediaries.
With the advent of blockchain technology, the use of smart contracts increased significantly. Blockchain-powered smart contracts are self-executing computer protocols. They regulate the agreements between traders and are recorded on a blockchain. Smart contracts control the overall transaction execution and also make them transparent, traceable, and irreversible. The primary purposes of implementing smart contracts are automating the processes and eliminating the need for mediators — central authority, third-party agencies, or brokers — from the transaction processes.
How Does a Smart Contract Work?
Yes, just how do smart contracts work, then?
To find the answer , let’s start by looking at how a smart contract can be used:
Let’s imagine that Rituraj wants to buy Medha’s house. This agreement is formed on the Ethereum blockchain using a smart contract. This smart contract contains an agreement between Rituraj and Medha.
In the simplest terms, the agreement will look like this: “WHEN Rituraj pays Medha 300 Ether, THEN Rituraj will receive ownership of the house”.Once this smart contract agreement has been put into place, it cannot be changed — meaning Rituraj can feel safe to pay Medha 300 Ether for the house.
Without the use of a smart contract in this scenario, Medha and Rituraj would have to pay lots of fees to third-party companies. Including the bank, a lawyer and a house broker.
It’s great, right? No more commissions and no more delays to wait for a lawyer and broker to process the agreement! This is just one of many examples of how a smart contract can be used.Smart contracts are automatically executed once the conditions of the agreement are met. This means there is no need for a third party, like a bank, a broker, or a government.
How Is This Possible?
we have the blockchain to thank. Because of blockchain technology, we are able to decentralize smart contracts so that they are fair and trustless. By decentralizing, I mean that they are not controlled by one central party (like a bank, broker, or government, etc.).
The blockchain is a shared database run by many computers (called ‘nodes’) belonging to many different people. Because of this, not one single person or company has control of it.
It means it’s near impossible to manipulate it — the hacker would need to hack more than half of the nodes (51% consensus) if they wanted to attack the blockchain or the smart contracts that run on it. Therefore, smart contracts can run safely and automatically without anyone being able to change them! Now you know even more about what a smart contract is!
Why do we need smart contracts?
Let’s first talk about why business leaders need conventional contracts in place. The answer is quite simple. They don’t trust another party and the lack of trust among parties involved in the contracts to execute the contracts as required is not something new. For instance, would a CEO would trust a realtor to sell their commercial building without a prior contract with him, now would you? How about if you have never met the individual you are about to transfer money to on the internet?
Since smart contracts, use cryptography, they’re practically impossible to change, and self-execute, solving this problem. There are a lot of reasons why smart contacts are considered better than traditional agreements and contracts. Some of these are as follows:
- Smart contracts offer simplicity, real-time updates, and speed of execution, which traditional contracts cannot offer
- Smart contracts avoid redundancy of the centralized entities and intermediaries who usually contribute to increasing the risks
- Since there is no intermediary involved to regulate and monitor the transactions, it leads to lower fees and faster execution
- Smart contracts ensure self-execution accuracy as there is no delay in providing the mutually agreed incentives
- There is a guaranteed certainty, transparency, rightfulness, and safety of the process.
What are Smart Contracts Currently Being Used For?
As I said earlier, Medha & Rituraj’s house sale is not the only scenario in which smart contracts can be used. Smart contacts can be used for any type of transaction — it doesn’t have to be financial.
The possibilities are endless for smart contracts. They are already being used for financial trades and services, insurance, credit authorization, legal processes, and even for crowdfunding agreements (ICOs).
Let’s look at how smart contracts are already benefiting certain industries and how they will benefit other industries in the future…..
Insurance Companies
Two insurance companies, Atlas Insurance in Malta and Axa in France, tested smart contracts in 2017. They had prototypes that compensated airline customers if their flights were delayed.
Let’s see an example:
Shanu is about to fly from NYC to Los Angeles. He sends $5 worth of cryptocurrency to the Axa Insurance smart contract and provides his flight number. Axa sends $95 to the smart contract. So, there is $100 in the smart contract.
If Shanu’s flight is on-time, Axa is sent $100 from the smart contract. But if the plane is late, $100 is sent to Shanu from the smart contract. Everything is automatic.
This saves lots of time and money. It also means that Shanu does not have to trust that AXA will pay him the agreed amount if his flight is late — he knows that if it is late, the smart contract will instantly send him his compensation ($100).
Real Estate
You can get more money through smart contracts. Ordinarily, if you wanted to rent your apartment to someone, you’d need to pay a middleman such as Craigslist or a newspaper to advertise and then again you’d need to pay someone to confirm that the person paid rent and followed through. The ledger cuts your costs. All you do is pay via bitcoin and encode your contract on the ledger. Everyone sees, and you accomplish automatic fulfillment. Brokers, real estate agents, hard money lenders, and anyone associated with the property game can profit.
Digital Identity
Implementing smart contracts in digital identity management would reduce identity theft & data misuse to a greater extent by making KYC mandatory and eliminating multiple parties involved in the transaction.
Trade Finance
Smart contracts make the global trade finance processes more streamlined and secure by reducing the processing time, eliminating intermediaries, cutting costs, and increasing transparency and trust.
Clinical Trials
Smart contracts reduce manual errors significantly and provide an excellent opportunity to rebuild an existing clinical trial process stored on a blockchain network, thereby enhancing the overall quality.
Global Trade
Blockchain-based smart contracts could enhance the communication between importers and exporters by automating the agreements, settling the trades quickly, planning business events and other processes.
Government Processes
Adopting smart contracts in government systems will eliminate the manual-intensive processes, reduce higher management costs, put an end to corruption, and increase the trust in government schemes.
Supply Chain Management
Implementing smart contracts will improve the efficiency, transparency, traceability, and accountability of the logistics businesses while simultaneously strengthening the relationships among participants.
Education Platforms
Smart contracts play a vital role in upgrading the current education system by making the learning materials readily available, connecting teachers & students directly, and tracking payment distributions.
Decentralized Finance
Smart contracts create exciting opportunities for small & medium businesses, facilitate P2P payments & settlements, create secure marketplaces boost energy management, and monitor the loan processes.
Health Systems
Health systems will use smart contracts to record and safely transfer data.
We can already see examples of smart contracts being used in the medical industry by the likes of EncrypGen. This is an application that uses smart contracts to transfer patient data in a secure way, allowing no access from third parties.
This way, the patients are in control of their own data. If researchers want to use patient data, they must pay for it. Not only that, but the patient has to choose whether or not they want to sell it to them.
So You can see from above I have given that smart contracts are already beginning to replace middlemen. We also saw the potential this has for future applications — remember Rituraj’s and Medha’s house sale? They didn’t need an estate agent, lawyer or bank, did they?
So, if smart contracts fulfill their purpose, perhaps we’ll one day live in a world that is free of middlemen.
What would happen then?
The best thing about having no middlemen is the fact that we save a lot of money. Not only that, but we would no longer need to trust anyone, either as trust issue is the biggest problem of current set-up.
There is a potential downside, too, though: people may lose their jobs. A middleman is a real person, just like you and me. Why would someone pay an employee to do a job that could be done for free by using a smart contract? They wouldn’t.
Of course, no one knows what the future holds. All we can do is guess and predict, but we must be prepared for all possible outcomes.
So, as you can see, smart contracts can make the world a better place that is free of commission. It can reduce fraud, delays, and the overall cost of many things. However, as we further advance technology, we remove the need for certain jobs. Now that you’ve read this guide, you should feel comfortable answering the golden question: ‘what is a smart contract?’.
With that, I conclude this Smart Contract blog. I hope you enjoyed reading this blog and found it informative & interesting.
About Me:
Hey there , I am Supriya Patidar. I am an Undergraduate Student at IIIT-Allahabad & member of the FOSS wing at GeekHaven, IIIT-Allahabad.
