We live in a “programmable economy” that has witnessed radical changes brought in by disruptive digital technologies such as IoT, Analytics, AI, Automation, Blockchain and so on. These technologies drastically change the way we do business with our vendors, partners, and customers, and also impact how business contracts are formulated, executed and enforced. From paper to paperless documents, digitalization has helped us gain numerous advantages, but not the whole of security. While digital documents take less time to travel around the globe, they are easily prone to forging. What if these contracts could self-verify and self-execute automatically, in a secured environment, if the given conditions are met?
Rise of Smart Contracts
Smart contracts emerged as an answer to the above question. The term was coined by Nick Szabo in 1996, stating that the digital revolution has made it possible to formalize contracts in a smart way, far more functional than their paper-based predecessors. Verification and enforcement of contract laws through cryptographic protocols has been existent, even before the emergence of Blockchain technology. The present Blockchain-based smart contract implementation underlines the computation that takes place on a Blockchain network or a distributed ledger, such as Ethereum or Bitcoin smart contract platforms. Here, a computer program enforces the contract built into the code.
What are Smart Contracts?
These are self-executing contracts that function autonomously, in a transparent, conflict-free and secured environment, without needing the service of intermediaries. It helps you store and execute business agreements, wills, legal documents, property deeds, shares, health records, or anything of value.
Why Blockchain for Smart Contracts?
Prior to understanding how Blockchain provisions smart contracts, one has to acknowledge the technology’s growing role in simplifying business and exchange between two parties. Blockchain allows businesses to transact more seamlessly and efficiently. The impressive capabilities of Blockchain go way beyond payment transactions and cryptocurrencies. An exciting area to look ahead is the Blockchain powered self-executing smart contracts.
Built on the power of Blockchain, a smart contract is:
- Predefined logic, that appears as a computer code
- Stored and reproduced on Blockchain
- Executed and run by a network of computers that run Blockchain
- Helps update accounts on the ledger, for instance, payment for an executed contract
Ethereum is the most prominent public Blockchain platform for smart contracts. On a basic level, a smart contract performs three key functions: performing calculations, storing information and sending transactions to other accounts. More significant is the autonomous nature of such contracts; as they self-execute based on a set of pre-defined and encoded instructions agreed by two parties involved in the transaction.
- Smart contracts eliminate the reliance on third-party intermediaries to perform transactions. This in turn avoids any vested interests and guarantees complete autonomy in contract enforcement.
- Since documents are encrypted and stored on a digital ledger, the parties involved can access them safely. Any edits made by a party to the contract’s content is visible to everyone involved in the cycle. This improves transparency through formulation to execution of a contract.
- It offer a low-cost way of operation by saving middlemen expenditure, and minimizing the chances of revisiting a pre-defined contract.
- The transactions are performed with high reliability, which enables new business models and opportunities of growth.
- With Blockchain-powered smart contracts, organizations can establish a streamlined, enterprise-wide contract management platform.
- Since the contracts use software code to automate tasks, they are less prone to manual errors, and offer real-time updates with speed and precision.
- As the documents exist in a highly encrypted form, they remain impenetrable for hackers.
- Avoiding human management significantly reduces the risks involved in contract execution cycle.
According to a recent research from Onguard credit management solutions, more than 51% of the finance professionals surveyed plan to implement Blockchain-based smart contracts in the next 12 months. Currently, 19% of them work with Blockchain integrated smart contracts. These figures indicate the growing confidence in Blockchain as an ideal fintech solution. Beyond 2018, Blockchain-enabled contracts will make businesses faster and more flexible by offering these capabilities:
- Improved visibility on the organization’s risk-taking capacity
- Developing contracts that adapt with changes to underlying assets
- Learn from previous contracts and use the experience to transform
Smart contracts, truly are the digital protocols that enable us to deal with high-value digital assets, and execute the contract code securely without any third-party interference.