It is clear that Blockchain has had a profound impact on the economy. With its features of immutability and transparency, anonymity (decentralization), security, and security, the technology has made a huge impact on business processes.
However, blockchain has become more popular due to the elimination of intermediaries. Smart contracts, especially Ethereum contracts, reduce the chance of process conflicts, save time, and make the process more efficient, cheaper, and faster.
What are these contracts exactly? Why are they so popular?
Let’s get together and find out in this guide.
What are Smart Contracts?
As highlighted in our Entrepreneur’s Guide to Blockchain, Smart Contracts are one of three pillars of Blockchain technology. It allows you to exchange any value in a transparent and conflict-free ecosystem that is based on Blockchain with the help of an exchange software.
These Contracts are self-executing contracts that are programmed to meet or exceed the terms of agreements and take the appropriate action.
Let’s talk about what drew you in – The Smart Contract Benefits/Offers and its Limitations.
Let’s now dive in and learn more about the functioning of this blockchain concept.
How do Smart Contracts Work?
Let’s look at an example to understand how smart contracts work in a blockchain environment.
Let’s say that Albert wants to sell his car to Nancy in exchange for cash. Through a smart contract, they form an agreement via the Ethereum blockchain. It states:
“WHEN Nancy pays $25,000 in installments to Albert, THEN she will be given ownership of the car.”
This smart contract agreement cannot be altered because it is stored in a blockchain environment. Nancy does not need to worry that Albert might suddenly ask for more money. To prove she made the payment, she does not need to pay any additional fees to third-party businesses like banks, lawyers, or car brokers.
She won’t be required to pay any additional commission, or suffer delays due to external factors. Smart contracts will be executed automatically if the condition is met.
Let’s now talk about the smart contract benefits/offers and their limitations.
What Smart Contracts Promise To Do a.k.a The Benefits of Smart Contracts
Blockchain underlying smart contracts have the greatest benefit: they are decentralized. They don’t require any third-party involvement in the process. This ensures that the process is autonomous.
Smart Contracts require that all terms and conditions be recorded clearly.
Smart contracts have one of the greatest benefits: it reduces disputes to zero.
Smart Contract’s TnCs are visible to all parties and are easily accessible by them. This negates the potential for dispute. A smart contract is also definite and has no between-the-line clauses. This eliminates the possibility of disputes.
4. High speed
Smart Contracts run on software codes and are faster than real-world contracts which require documentation.
5. Data storage
Smart Contracts store a list of critical details for every transaction. This means that any details you have entered in the contract will be available for future reference, and can be permanently stored.
Smart Contracts are also equipped with many features, including Transparency and Security. There is no possibility of bias, manipulation, or error. This increases trust in the ecosystem.
7. Cost Savings
Smart contracts reduce the costs associated with their implementation by automating most tasks and eliminating intermediaries.
8. Solid Backup
Smart contracts can replicate all transactions. This makes it easier for parties to have a backup, even if the data storage device fails.
Let’s now move on to the next section of the smart contract guide: the use case for smart contracts.
Smart Contracts in Different Industries and Sectors
1. Financial services
Smart contracts are a way to transform traditional financial services by implementing them.
- Trade clearing – Manage the approval workflow between counterparties and transfer money once trade settlement amounts have been calculated.
- Insurance Claim – Performs routing, error-checking, and the approval workflow. Once the workflow is correct, it transfers payment once the payout has been calculated based on claim type and the policy.
- Micro-insurance – Calculates and transfers micropayments based on usage data from IoT-enabled devices.
- Transparent auditing – Integrates key tools for bookkeeping and eliminates the possibility of infiltration of accounting records. It allows stakeholders to participate in decision-making in a transparent way.
- Micro-lending – This allows you to assess the value of the principal collateral and store them securely in a database. This makes each transaction quick, transparent, and invariable.
Smart contracts have also changed the healthcare landscape through a variety of uses.
- EMR – Allows for the transfer or access of the health record after multi-signature approval has been obtained between providers and patients.
- Medical Research – Researchers have access to users’ health data through micropayments.
- Track Health – Track the health events of patients through IoT devices. Rewards can be given for reaching milestones.
- Health Insurance – This reduces inefficiencies by adding patient information to policy forms, eliminating intermediaries, and preventing hackers from accessing the database.
The benefits of blockchain-powered smart contracts are numerous.
- You have the freedom to license media in the same way that a copyright owner would like.
- Automated transactional tasks that were previously performed manually.
- Processes are more efficient, faster, and more accurate.
4. Voting and the Public Sector
Blockchain can store public data. Smart Contracts allow for the transmission of the information to the parties who request it. The data owner is still in control.
The voter criteria can also be validated, and you can take specific actions by joining the blockchain ecosystem.
5. Supply chain
Smart contracts are making it possible to perform a variety of actions in the supply chain.
- Payment Transfer – This allows people to transfer the payment after the multi-signature approval of the letter credit.
- Product Provenance is used to issue port payment after custody change for the bills is made. It also allows chain-of custody for products in the supply chain, where the party in custody can log evidence about each product.
Smart contracts of all types are being used to restructure the IoT industry. As part of the Blockchain of Things, they allow sensors and connected devices to create their own nodes and track orders in real-time. This ensures the correctness of product delivery from the initial shipment.
Smart contracts have many benefits and are now the standard for various business verticals. This encourages established companies and startups to work with a well-respected blockchain development company. It is expected that the market value of this company will be close to USD 300Mn by 2023.
But there is a problem. Smart contracts in the Blockchain environment have many benefits, but they are still not fully developed. They also have limitations.
Let’s now consider the other aspects of Smart contracts. These are often overlooked.
What Smart contracts Does Not Promise To Do
1. It’s easy to correct
Smart Contracts are a Blockchain element and have the same benefits as Blockchain. Although this immutability sets security standards, there are some limitations.
Because they are almost impossible to modify, even the smallest error in code can prove costly and time-consuming once the smart contract has been deployed to execute.
Note: De-facto mutation is a solution that blockchain developers use to fix this problem. De-facto mutability is an option for developers. They can store the addresses of the contracts they wish to call in modifiable storage, even though the code itself is immutable.
2. Loophole cases
There is a lack of clarity regarding the ‘implied covenant in good faith and fair dealing’. The US Law has a concept called Good faith. It states that the parties will treat each other fairly and not rob each other of the benefits of the contract.
Smart Contracts make it difficult to verify that terms are in line with the implied agreement.
Imagine that you order a signed tennis ball, but you receive a forged one. In normal circumstances, you might have been able to take the case to court under Contract Law. But with Smart Contracts, this possibility is almost non-existent.
3. Third Party Elimination
Smart contracts face many challenges. It is difficult to eliminate third parties. Although eliminating third parties is a common paradigm for Smart Contracts and Blockchain, it does not eliminate them.
Let’s take lawyers as an example. Although users won’t have to visit lawyers to obtain a contract, developers will need to contact lawyers to learn the terms of the smart contract.
The involvement of third-party entities is not going away. They just play different roles to those they played in the non-decentralized smart contracts.
4. Legal unclarity
Disputes are elements that are an integral part of Smart Contracts within the blockchain ecosystem. In paper contracts, this can be due to an ambiguous statement such as “Sufficient Cause”, but in Smart Contracts, it can happen as soon as the user passes a statement stating that the code has been bugged.
Users will eventually have to start a legal proceeding to determine who is right. This was not the reason Smart Contract was created.
Smart Contract offers many options for handling disputes
- Smart Contract has one solution to disputes: vote. Businesses can hold a vote to determine who is right if there are multiple parties in the Smart Contract.
- Introducement of an arbitrator (or more), who will act in the role of a judge in cases of dispute.
- It is necessary for both parties to sign the contract before it can be closed.
5. Management of Vague Terms and Conditions
Contracts can include many implied terms and conditions. They are not always clear-cut. Smart contracts can be used to handle transactions where only a few parties are involved. However, smart contracts will not work if you intend to introduce an event such as the one shown above.
The inability to deal with vague tncs is one of the key legal issues surrounding these Contracts. This issue must be rectified immediately if the concept is to become mass-adopted.
These are just a few of the problems that these Contracts have yet to be adopted widely. As the concept develops, more issues will emerge and be an integral part of every business.
If you look at the positive aspects of these Contracts from a business perspective, you’ll see many reasons to implement them in your company. However, when you break it down, there are a few limitations that can be overcome.
Overcoming the Limitations of Smart Contract
You can either ignore the limitations of these Contracts and assume that they will revolutionize your company, or you make the right move that would render your Smart Contract unhackable, regardless of whether it’s an Ethereum Smart Contract or one that is based upon another platform.
This article discusses the Right Move: Hiring a team of Blockchain Developers who are familiar with the concept, have knowledge in Parallel Programming, and know the types of bugs that could be found in the Smart Contract Code. You can only get complex contracts if you invest in Smart Contract experts.