What are Smart Contracts?
Smart contracts are self-executing protocols with explicit terms and conditions that store and carry out contractual terms on a blockchain. The process is decentralized, and there is no need for intermediaries to do the transaction while using smart contracts. On the other hand, traditional contracts are terms described in a natural, human language.
A smart contract's authenticity is its main advantage, as traditional contracts can be manipulated or forged if not appropriately protected. Another issue with the traditional contract is that it can be signed on both ends by one party without the other party being aware. However, a smart contract cannot be signed by anyone other than the party who owns the digital key signature.
Smart contract verifies, validates, captures, and enforces agreed-upon terms between multiple parties via blockchain technology. A blockchain-enabled smart contract allows carrying out agreements between parties without the need for a central entity, external force, or legal system.
As all the data stored are easily traceable and secure, blockchain works best for smart contracts. And stored data in the contracts is encrypted and exists on a ledger, so the recorded information in the blocks is never lost or deleted.
Where are Smart Contracts Used?
Smart contracts are used in multiple industries, such as:
- Supply Chain Management
Smart contracts are used in supply chain management to make the process more transparent. It helps to smooth out the movement of goods and restore trust in trade. Smart contracts keep track of ownership rights as products move through the supply chain, recording which is responsible for which product at any given point.
- Insurance
It takes months and months for an insurance claim to be processed and paid if done manually. With Smart contracts, one can easily streamline the claim process as information is recorded on the blockchain to determine the exact amount of compensation.
- Financial Industry
Smart contracts are widely used in the financial sector, as money and documentation have become electronic. In the financial industry, smart contracts are used for payment processing, clearing/settlement of financial instruments, trade finance, and regulatory technology such as streamlined 'know your customer' certification.
- Mortgage Loans
Smart Contracts are used to simplify the mortgage process. The clauses of the mortgage agreement are decided based on the mortgagee’s income, expenditures, credit score, and other circumstances. When a third party carries out these checks, the process becomes lengthy and complex for both the lender and the mortgage. Therefore, by optimizing smart contracts and cutting out the intermediaries, parties directly deal with each other.
- Legal Ops
Blockchain-enabled smart contracts have a significant impact on the legal sector, both regarding how firms serve their clients and how law practices are run. Smart contracts are an agreement in the form of computer code that runs on a blockchain. They cannot be altered, and there is no need for third-party involvement. Compared to manual contracts, smart contracts save expensive legal time and streamline the entire contract workflow management from authoring to execution and renewals.
Benefits of Blockchain-based Smart Contracts
- Speed and Real-time Updates
As smart contracts work through software code to automate tasks that are typically done manually, it increases the speed of a wide variety of business processes.
- Automation and Efficiency
Smart contracts can enhance the efficiency of commercial arrangements. Smart contracts are automated. Hence there are no middlemen involved, and paperwork does not take up time. In addition, a contract between the parties can be executed in less time, at a low cost, from wherever the involved parties are without the involvement of lawyers.
- Low Execution Risk
As smart contracts are automated, it eliminates various operational expenses and saves resources, including the personnel required to monitor a highly complex process based on conditions across multiple companies.
- Accuracy and Transparency
One of the benefits of the smart contract is that the codified terms are accessible and visible to all the relevant parties, so there can be no disputes once the contract has been set up. In addition, it provides complete transparency and removes the likelihood of manipulation, bias, or error.
- Security
Smart contracts offer better security as all actions are recorded and verified. As blockchain transaction documents are encrypted, it is tough to hack them. In addition to security features, smart contracts can also generate backups and copies automatically in the case of damages, data losses, or hacks.
- Trust
Smart contracts provide trust. The transactions are automated and performs according to predetermined laws. The information in the contract and the terms mentioned in the contract are straight. Thus, specific validation by all the involved parties and the immutability of the work ensures that the smart contract cannot be broken.
Future of Smart Contracts
Smart contracts led the organizations, legal bodies, governments, and individuals to exchange properties, shares, bonds, monetary value, and a contract clearly without conflict and intermediaries. As a result, simplifying and automating routine processes for which individuals pay banks and lawyers sizable fees may disintermediate the legal and financial fields.
According to an investigation report by precision reports, the global Smart Contracts market size is projected to reach USD 345.4 million by 2026, from USD 127 million in 2020, at a CAGR of 18.1% during 2021-2026.
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