What is a smart contract, how they can be trusted and its real world examples

The Problem

Intermediaries rule the world. Whether you are a business or an individual, you must be paying hefty sum of money and sometime that too unknowingly. There is always intermediaries that stands between two parties just to make the transaction by affirming the terms and conditions.

Some of them are banking institutions who verify transaction of money, law enforcement agencies which validate the legal contracts, governments and others.
The problem here is that they work on a centralized model where the third party intermediaries are necessary for the smooth functioning of the business or governance.

Fortunately, blockchain is here to solve this problem as the decentralized nature of it can help eliminate third party intermediaries. But how is this possible?

The Solution – Blockchain Smart Contracts

The third party middlemen were executing the contracts between the two parties and were able to make huge amount of commissions. This can be effectively done through the usage of smart contracts.

What is a smart contract?

It is a piece of computer code or software which can be programmable to execute certain rules at a certain period of time or in intervals.
This can be visualized as (image visualization here)
If this happens – do this
Else – do that
These specific terms if programmed can execute the rules when certain conditions are met which triggers the execution.

How smart contracts can be trusted?

Smart contracts when stored in a distributed ledger cannot be faked or tampered and hence we can ensure the credibility. This also allows anybody in the blockchain node to view the transactions as it is transparent. Since it is also distributes, there’s no chance of fraud.

Smart contracts can also be programmed to execute if another smart contract triggers it. This way, we can make a series or set of smart contracts to make things happen without third parties.
As of now, there are two major smart contract providers who can be used effectively by any business to develop smart contracts.
They are Bitcoin and Ethereum. Bitcoin’s RSK (Rootstock) and Ethereum’s Solidity language allows developers to develop any kind of smart contracts.

Real World Examples of Smart Contracts

Smart Contracts in Banking

By checking the credit score and credit history and verifying the users through e-KYC, smart contracts can be able to issue loans in varying amounts. This can be done without the need of any third parties. Since, banks go through these three steps to check the eligibility before issuing loans, smart contract can effectively make this happen.

Smart Contracts in Supply Chain

Disputes often arise if the transported goods are delivered in broken condition or with defects. Sometimes, the packages even get lost in the supply chain. To tackle this issue, packaged equipped with smart IoT sensors track every movement of the product from the origin to the destination. If breakage happens in transit, the IoT device will be able to detect it and it broadcasts the info on the blockchain. Now, the smart contract automatically penalizes the logistics and so the user will be sent another package or simply the amount gets refunded, thus can reduce disputes.

Smart Contracts in Insurance

If you’ve subscribes to the insurance provided by airlines, and if the flight got delayed, you’ll get the insurance instantly and that too automatically if smart contracts are in place. This saves effort and time needed to contact the insurance company and producing documents about flight’s status. After all, they take time verifying the claim and then issue the insurance amount. Now, which is simple?

Smart Contracts in Betting

Let’s say, I bet it’ll rain tomorrow and you bet it won’t. The bet amount is $10. Now, we have three options. If we are friends, then there’s trust but when it comes to betting with strangers, we need the trust be established. Instead of relying on the third party middlemen, we can program a smart contract which checks the data which the weather monitor (IoT device) broadcasts on the blockchain network. It also collects the amount from both of us, checks the weather and issues the payment to the winning bet. Simple, isn’t it?

Smart Contracts in Agriculture

IoT devices employed in the farms can effectively monitor the usage of chemical fertilizers and pesticides to be used in the crops. If those food products arrives the market in the name of organic foods, it can be easily identified and those involving in fraud can be penalized automatically by programming smart contracts.
The list doesn’t end here as the possibilities are truly endless.