“It’s still magic even if you know how it works”- Terry Pratchett
What if you were told that there is a way that you can exchange money, property, shares, or anything valuable in a transparent, conflict free way while avoiding the interference of a third party? Well, Smart contracts can help you do this. Smart contracts are unregimented contracts holding the terms of an agreement between the client and the dealer, which is directly written into lines of code. The codes and agreements contained therein exist across a distributed, decentralized Blockchain network. In simpler terms, a smart contract is a computer code running on top of a blockchain containing terms and conditions under which the parties agree to collaborate with each other.
It was in 1994, when Nick Sabzo, a legal scholar, and a cryptographer, realized that the decentralized ledger could be used for smart contracts. Through this pattern, contracts could be changed to computer code, stored and replicated on the system and administered by the network of computers that run the blockchain. A smart contract is actually a bitsy computer program that is saved inside a Blockchain. These contracts which can turn legitimate bonds into automated processes, also promise us a greater level of security and low transaction costs.
The basic idea of a smart contract is to avoid depending on a third party and allow visibility and access for all relevant parties. But what exactly can they be used for?
Due to lack of automated administration, it can take a lot of time for an insurance claim to be processed and paid. This is an area of concern for the company and for the customers as well because it leads to inefficiency and admin costs. A smart contract can conduct the process by naturally triggering a claim when certain events occur. For example, if you lived in an area that was hit by a natural calamity and your house sustained damage, the contract would catch this automatically and begin the claim. Exact details could be recorded on a blockchain in order to find out the exact damage. The same process could be executed for a car accident, or if somebody reported an insured personal device as stolen.
Apart from insurance, smart contracts can prove useful for supply chain management. Supply chains management involves the flow of goods from raw material to finished product. The contracts can record ownership rights as items move along the chain confirming who is responsible for the product at any particular time. The finished product can be verified at each stage till it reaches its destination. If an item is lost or delayed, a smart contract can track the product to its root and find out the reason for the same. If any stakeholder fails to meet the terms of the contract, it would be visible to the entire network.
Another appealing application is mortgage loans. The terms of such an agreement, for example, are based on the assessment of the mortgage’s income, outgoings, credit score and other conditions. The need to carry out these checks through a third party can lengthen the process for both ledger and mortgagee. However, if we are able to cut out the middlemen, the parties can deal directly with each other.
Smart contracts can be used for protecting any copyrighted content. Anytime when a piece of content is used for commercial purposes, a song for example, the owner of the rights to that song receives a franchise fee in theory. However, since producing a song is a collaborative process, there are multiple parties involved in the song-making, it is difficult to say who owns the rights and is entitled to payment. This has led to chaos over entitlement, no doubt giving some contributors more than what they deserve and some, nothing at all. Smart Contracts can make sure that the royalties are received by the rightful party by recording ownership rights in a decentralized blockchain system.
Smart contracts tend to have benefits for a wide range of industries, reducing unnecessary costs and time. We can say that they are more efficient than traditional contract law, and can prove to be of greater security as all actions are verified. However, smart contracts can also be prone to risks, but this is a technology that most certainly cannot be ignored.
Feelium is a blockchain technology platform offering smart contracts and escrow services for trust-less online transactions. Learn more about Feelium at www.feelium.co.png)