Smart contracts – A blockchain technology that can redefine our future.
Smart contracts are simply a set of predefined instructions deployed on the blockchain, first created in 1990 by Nick Szabo, and then weakly adapted by Satoshi Nakamoto when creating the Bitcoin protocol. The Ethereum blockchain is the first blockchain network to utilize smart contracts at a larger and functional scale, and it attracted a lot of attention in 2015 with the launch of the Ethereum network.
Because the blockchain is a trustless, immutable, decentralized database, operations carried out on the blockchain must likewise be trustless, ergo smart contracts. These pre-programmed instructions (codes) are transparent, trackable, and automated, and anyone can inspect them. They are immutable, so their content can not be changed. Interacting with a smart contract allows transactions to be carried out without the involvement of a third party because the instructions are preset. This creates a fully decentralized system that provides improved security while also lowering associated expenses.
A rather common example of how a smart contract works is a vending machine. When an individual interacts with a vending machine, there’s no need for a third party. Once the individual puts the money in the machine, an automated process begins that verifies the amount and checks it with the selected drink. If the selected drink instructions match the amount as predetermined by the “contract,” the drink will be released to the individual. Unlike a vending machine, a smart contract deals with more complex asset classes, both digital and physical.
What are the benefits of integrating a smart contract ?
Now that we understand how smart contracts work, we can obviously tell that they have the potential to make life considerably easier for a number of key factors, such as:
- Automation: Contracts and agreements are automated and run without external influence.
- Time-efficient: It is considerably fast and time-efficient at carrying out instructions in a matter of seconds, essentially providing accurate results in very little time.
- Cost-efficient: A cost-efficient data storage that eliminates the need for paper records, as all the information can be sourced directly from the blockchain.
- Security: This offers an entirely new level of security to transactions and data privacy, as these transactions are encrypted and cannot be altered for personal benefits.
- Transparency: Increased trust and transaction transparency free of potential manual manipulation by either contracting party.
Smart contracts are relatively new technology and have had their fair share of exploits over the last couple of years. Most of these exploits have been especially rampant in the cryptocurrency world, with billions of dollars stolen from smart contracts that were not properly audited before being deployed to users.
What to expect when we see higher smart contract adoption?
The smart contract market is expected to reach approximately 300 million US dollars by the end of 2023 with a 32% growth rate. This implies a projected higher adoption rate for smart contracts globally. A higher smart contract adoption rate could revolutionize a lot of industries.
Some industry-specific use cases of smart contracts are
Supply chain management:
Supply chain management can simply be looked at as the movement of goods. Its management, if taken over and run by smart contracts, will be greatly optimized. With the help of “internet of things” trackers and smart contracts, items can be tracked, routine tasks can be automated, payments can be automated, all these benefits coming with next to zero paper trails. With each and every piece of information permanently and securely stored on the blockchain.
The global insurance industry is worth 5.23 trillion US dollars. Utilizing smart contracts can save millions of dollars in logistics and paperwork by automating insurance claims, saving time in verifying claims and significantly reducing fraud as smart contract operations are transparent and immutable. Capgemini estimates that smart contracts save the insurance industry around $21 billion in annual costs. AXA, a leading insurance company, has launched a product called Fizzy, which utilizes smart contracts for flight delay settlement. The smart central relies on information obtained from global air traffic databases and issues a payment when flights are delayed past two hours.
Financial data recording
Organizations can implement smart contracts for accurate, transparent data recording, exploring a new frontier in bookkeeping but without the books, rather with an immutable blockchain that stores all information, improving security and the speed with which data can be retrieved and accessed. A smart contract allows for more coordinated financial data-keeping across organizations, eliminating the need to exchange other documents such as invoices, report logs, and so on. Data can be exchanged in a split second without conflicts over its authenticity, allowing for more market stability within financial organizations.
Transport and logistics.
Smart contracts can simplify most of the processes in the transportation and logistics industry, handling agreements, record keeping, cash flow, tracking of items, and even escrows. Shipchain is a blockchain platform that, through smart contracts, allows for the tracking of shipments from the beginning to the end of their movement. This platform was designed specifically for the transport and logistics industry.
An environmental case for smart contracts.
Smart contracts have the potential to play a very important role that can revolutionize the environment and how we live sustainably. As earlier discussed, we’ve seen just how much smart contracts are an upgrade of every existing system that functions in its stead. The environment isn’t left out of this.
ESG, discussed here, is playing a leading role in our fight against climate change as companies now seek to embody more environmentally sustainable practices. However, we’ve seen that the inconsistency of data proves to be a huge weakness, affecting the ESG compliance of firms and investors. Smart contracts can help significantly optimize data collection and reporting on areas such as carbon credits, carbon offsets, sustainability milestones, pollution and emissions data, and so on. All of these can be upgraded and run using smart contracts that would provide immutable and trustworthy data for the investors, fostering a new level of transparency in an industry in need of it.
TREUM is a blockchain-based supply chain firm that is working with the World Wildlife Fund to revolutionize the tuna market by utilizing smart contracts and blockchain technology. The geolocation of a tuna fish is sent to the Ethereum blockchain using an RFID tag attached to it. These fish can be traced to supermarkets and include QR tags that allow customers to check if it was caught sustainably and ethically, who caught it, where it was caught, and when it was caught.
With FUND THE PLANET minting NFTs (Non-fungible tokens) using a smart contract that represents Peruvian rainforest parcels encompassing over 200 hectares, smart contracts can play an even bigger role in the environment, conserving the rainforest and all of its biomes and animals. Individuals and businesses can acquire these NFTs from anywhere in the world, allowing them to protect rainforests and reduce their ecological footprint while living more sustainably.
What the future holds for smart contracts.
Many people are concerned about the environmental impact of blockchain technology, hence there is widespread skepticism. We can see that the potential blockchain and smart contracts possess is massive. The rate of adoption has been relatively slow, which does not undermine just how effective it is in solving a lot of modern-day problems. Recently, there has been a shift towards more environmentally friendly blockchain technology with Proof of Stake blockchain, which requires nearly insignificant energy to run. With that in mind, we may see greater adoption of smart contracts in the coming years.