Smart contracts based on blockchain is one of the bleeding-edge technologies of the digital age. It is considered a breakthrough technology that can be beneficial for multiple domains including government, healthcare, law, real estate, supply chain and financial services.
What exactly is a Smart contract?
Smart contracts are self-executing contracts that eliminate the need for intermediaries in the contracting system. They are able to do this because they run in a decentralized and conflict–free ecosystem, saving on time, money and manual effort. Smart contracts also ensure safety and prevent loss of documentation as everything is backed up. This explanation may seem to be a little too generic, as it will not convey specific details apart from highlighting a few keywords used for searching online.
As per experts, there is no universally accepted definition for Smart contracts. Most people involved with blockchain would expect at least the following three elements to be included in order to consider a transaction to be a Smart contract:
- transaction must involve more than a transfer of a virtual currency from one person to another
- transaction involves two or more parties (as every contract must) &
- implementation of contract requires no direct human involvement after the Smart contract has been made a part of the blockchain. This last element that makes these contracts “smart,” and therefore, merits a more detailed discussion
For a better understanding, we will focus on some of the keywords highlighted in the explanation.
- Contracts: Contract in this context implies a set of terms/agreements and their corresponding action plan, converted to code. This code is then deployed in the nodes of the blockchain. Nodes are computers spread across the blockchain. Each node belongs to a participant part of the contract. Thus, the contract will be distributed across individual participant databases
- Self-executing Contracts: These are a set of code/contract terms programmed to be automatically executed when certain specific criteria related to the contract/agreement are fulfilled/ unfulfilled. The key point is that, whenever the set terms are auto-executed, involved parties can validate the outcome without any intermediaries
- De-centralized: The term indicates that the Smart contract is deployed on a blockchain platform on multiple nodes (shared database). By placing the contract on multiple nodes working in co-ordination with each other, the control of execution will not reside on a single entity. Since the code resides on individual nodes, whenever a code is executed, changing status of the code will be reflected on all nodes, and all parties involved can verify the transaction. Thus, any third-party involvement does not come into the picture
Whenever a contract agreement is met; for example, a consignment is delivered, and its verification acknowledged by a specific party, payment will be released to the other party. Thus, monetary transaction will occur between parties instantly without the involvement of an intermediary such as a bank.
- Conflict–free, saves time, money and effort: These are self-explanatory terms, since unwanted interference of third parties in the network is not present. A legal contract is monitored and executed without manual intervention. The process becomes conflict-free and saves on time, money as well as effort.
Having explained the basic concept of Smart contracts, let us now go into some of the few in-depth details related to the technology.
Ethereum –The platform for creating Smart contracts
Smart contracts can be coded on multiple blockchain platforms, Ethereum being the most popular one. This could lead to the question of why a bitcoin protocol is not the choice here. The answer is simple. The foremost objective of introducing an Ethereum platform was to support Smart contracts. The bitcoin protocol is in a constantly evolving state and it offers fewer functionalities as opposed to the Ethereum platform.
However, it has to be noted that Ethereum’s protocol is built to allow for flexibility and functionality that provides the capability to program different types of Smart contracts within the system. Ethereum is written in Turing complete language, which includes seven different programming languages. This is quite different from bitcoin, which is written in C++. (Source: The Economist)
Ether, the Ethereum-specific cryptographic token
Ether is the cryptographic token offering from the Ethereum platform and acts as a payment exchange for executing the terms or more precisely for running a line of code. Thus, for executing a Smart contract or for a transaction, Ether will be consumed, and the value will be based on how process-intensive the line of code is.
Applications of Smart contracts
Conventional methods of contracting consume effort in terms of having to deal with complexity, resources, time, effort and administrative cost. In a digitized environment, enterprises are opting for smart and reliable digital agreements, which is a good indicator of how far the Smart contract technology can find application in future.
Some of the applications of Smart contracts are as follows:
Internet of Things (IoT): Smart contracts find application in the IoT world where IoT devices are equipped with the ability to connect to the internet. The application can be implemented in the logistics domain where packages/consignments can be tracked through sensors at various stages right from the warehouse, on transit till the delivery location. Individual sensors act as nodes on a blockchain and record the position of the consignment at various stages. The position of the consignment will be read by the participating sensor, which will be agreed upon by the contributing nodes.
Healthcare: Smart contracts can make significant changes in the way the healthcare sector works. Changes can be made across data storage, sharing and security, drug prescription and supply, as well as insurance claims. A key advantage is patient data protection, where data can be accessed by the participating parties using the patient’s private key, thus restricting access to certain user sets with the privilege.
Insurance Claims: Another use case is insurance claim management. Insurance claim will be linked to the patient account and stored within the blockchain. Whenever a medical procedure is initiated, the contract will be executed automatically, triggering a payment by the insurance service provider.
Supply Chain: Implementation of Smart contracts in Supply Chain Management can eliminate the role of freight brokers which in turn can reduce the downstream price to the customer. Also, a bulk of the paperwork involved can be eliminated and the entire process will become transparent and actors at each phase be held responsible for their services.
Protecting Copyright: Smart contracts can be used to direct payments to original artists/ writers/ creators by means of recording copyrights within a blockchain system. This practice can be applied to any piece of original content that can be potentially pirated or could be susceptible to disputes over ownership.
International Trade: Smart contracts can streamline global trade through speedy processing of related documents and payments. It can improve the efficiency of cross-border payments and automate complex contractual agreements, thus saving time and effort greatly. Disputes related to payments and shipping of goods can also be solved much more efficiently using Smart contracts.
Smart contracts technology is evolving and poised to disrupt an array of domains and corresponding business processes as is evident from the above list of applications.
Experion has recently worked on some interesting projects involving Smart contracts. One of these projects involved working with a major forestry business in the US & Oceania region, by having their supply chain run on blockchain. It helps to reduce the cost of transportation, while ensuring 100% trust among all players in the chain.
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