Smart Contracts and Their Value

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Most people solely hear about blockchain in the context of Bitcoin mining; however, this technology goes far beyond the cryptocurrency topic. And one of the most interesting issues which isn’t often talked about is the possibility to make digitally protected contracts using blockchain.

 

 
What are these smart contracts?

Before answering this question let’s shed a little light on blockchain technology. It is a fully decentralized system that operates on a base of computers within one network. Blockchain is known especially for its transparency and immutability. This is why banks and government use this technology for various purposes. As you see, there is nothing surprising that 23% of financial organizations were planning to use this technology for cybersecurity purposes in 2016, according to Statista. Such proof beyond trust in the blockchain has made the realization of smart contracts possible.

There is a widespread view that smart contracts are not smart at all and they are not contracts. Well, yes. It is just a code, in fact. However, this technology is a much more complex element than traditional agreement.

 

What Are Smart Contracts

 

 

A smart contract is actually a computer protocol, which is based on different mathematical algorithms that can independently perform transactions while ensuring a full control over their conduction. Smart contracts allow exchanging of different assets including money, shares, etc. without addressing to intermediaries.

Necessary components for making smart contracts include:

  • Both Digital identification and signatures in the form of private and public keys. These attributes belong to contract participants.

  • A private decentralized environment for storing smart contracts.

  • The contract subject and the necessary tools that can conduct this contract. In case you need any calculations, you will have to create a crypto-currency settlement account.

  • Specified contract conditions that should be confirmed by all parties with the signature certification.

To make a traditional deal, you have to approach to a notary or lawyer and get the corresponding documents. Smart contracts work like vending machines: you put bitcoin into it (the registry), and the product or service you have ordered is recorded in your account.

Unlike traditional agreements, besides obligations and conditions, smart contracts automatically ensure following all contract terms.

 

Technological Background of Smart Contract Working Principle

 

 

A smart contract contains electronic offers that initiate processes in accordance with the contract conditions. A block of transactions is a database that is regularly checked by partners. A smart contract is an automated virtual mechanism: a specific condition X causes a corresponding commitment Y. The obligation can be caused by different conditions: the occurrence of a specific event, the expiration of a certain time, etc.

In that regard, smart contracts can be divided into the following types:

  • Completely automated smart contracts;
  • Smart contracts that have a paper copy;
  • Paper contracts that have encoded chapters.

A vending machine can represent how an automated functioning is carried out in smart contracts. At the time a buyer contributes the needed amount of money (condition X), the vending machine immediately transfers a product to the owner (commitment Y). In the same way, smart contracts allow to manage digital permissions for real assets. Due to the blockchain, there is no need to physically store the goods until specific conditions are met. Instead, the blockchain stores a ledger with the information about the deal.

 

 
Advantages of Smart Contracts

Smart contracts have a set of important advantages for different industries:

  • Independence: you no longer need to use the services of intermediaries to conduct transactions.

  • Security: a smart contract is stored in a distributed registry. Therefore, its conditions are immutable.

  • Economy: with no need for third-party intermediation, participants can cooperate on more favorable terms;

  • Reliability: in the case where all the conditions and requirements are met, the participants immediately exchange their assets.

 
Disadvantages of Smart Contracts

Smart contracts cannot be called an ideal tool for building business relationships between partners. This technology also has several concerns:

  • Legal status: cryptocurrency is usually used as a basis for smart contracts generation; however it has not been accepted yet as an official financial instrument in most countries.

  • Errors: to generate a smart contract, you should describe all conditions and options for further transaction. The more difficult the process, the harder it is to create a smart contract.

  • Lack of understanding: most users have little information about smart contracts.

Despite the above-mentioned disadvantages, smart contracts obviously have a high potential to become a widespread solution in the close future.

 

Smart Contracts: Case Studies

 

 

Smart contracts provide the contracting parties with the clarity of the contract terms and are available to both participants via an agreed data source. Contracting parties can review and monitor the status of the contract which ensures the transparency of transactions for both participants.

 
Fintech Sector

Barclays, The British bank, held the first blockchain-based trading transaction in the entire world. This bank has been using smart contracts all the time to register the ownership and payments exchange with other financial institutions. Smart contracts are also used by such cryptocurrency platforms as Ethereum. Its user can exchange cryptocurrency units via smart contracts which allows them to ensure deal’s cybersecurity.

 
Real Estate

When landlords rent apartments, they often use paid advertising services. If they use smart contracts (instead of paid ads), they pay with bitcoin only for encoding their contract and storing it in the blockchain registry. Such approach will allow both property owners and tenants to be sure that the deal is safe.

 
Healthcare

Personal health records can be encoded and stored in a blockchain with a private key that will provide only certain individuals with permission to access data. It allows to ensure HIPAA compliance. Smart contracts can also be utilized for providing medical services. Surgery prescriptions can be sent to insurance organizations right after the smart contract is conducted.

 
Automotive industry

In case of self-driving cars, smart contracts can determine the person who has caused the accident. Furthermore, car leasing can become more secure due to the automated fulfillment of contract conditions.

 

The blockchain and smart contracts obviously have their own concerns. Although, even in the current conditions, it is a considerably better solution than outdated centralized systems used by banks, states, and other structures. Unicsoft has a deep expertise in developing and deploying blockchain-based solutions in various technological companies.
 
Contact us at jm@unicsoft.net and get started with secure data processing!

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