What are Smart Contracts on the Blockchain?
Imagine a world where two parties enter into a contract without an intermediary. Thanks to smart contracts on blockchain technology, this future is not far away.
What are Smart Contracts?
Smart contracts allow two people or entities to enter a contract and set up mutually beneficial parameters such as
- When will they receive their payment?
- How much will they be paid?
- What are the circumstances under which either party can terminate the contract?
With smart contracts, the process of working together becomes streamlined and secure. Not only do smart contracts reduce operational costs, but it promotes trust among individuals.
How do Smart Contracts Work?
Smart contracts are self-executing agreements based on the concept of blockchain technology, initially proposed by Nick Szabo in 1998.
Smart contracts leverage secure, immutable digital ledgers to record terms and conditions between buyers and sellers. The contract is inscribed in lines of code.
This code is securely stored and supervised by thousands of computers spread worldwide, making the transactions both traceable and irreversible.
|Step 1||Step 2||Step 3||Step 4|
|Business teams and developers work together to define the precise rules that will determine how a smart contract will respond in any given situation.||After the developers have crafted their application, they use a specialized platform to write and validate its veracity. |
They then hand off this programmatic marvel for vigorous security testing by another squad of experts, ensuring it runs as smoothly as possible once released.
|Once approved, the contract is swiftly implemented on a blockchain or distributed ledger for long-term security.||After successful deployment, the smart contract is primed and ready to receive cryptographic signatures from an "oracle," a protected streaming data source.
Once it gathers all the required information, the magic happens - full execution commences.
What Problems Can Smart Contract Solve?
By executing agreements between two parties, they create accountability and automated systems to ensure that transactions happen as they should.
Examples of this are seen daily in purchasing and delivering goods; a manufacturer setting up payment via smart contracts with their suppliers can ensure that funds can be transferred automatically depending on the agreement between the two businesses.
Some Important Use Cases
Commodity Trading and Healthcare: How do you ensure that life-saving medication gets where it needs to go without complications or failure?
The question Sonoco and IBM have taken head-on with their new blockchain-based platform, Pharma Portal.
Powered by IBM’s Blockchain Transparent Supply, this platform leverages the database capabilities of blockchain technology to provide a transparent supply chain view of temperature-controlled medications when they are being transported across multiple parties.
Pharma Portal utilizes smart contracts – predetermined digital agreements built on blockchain – ensuring life-saving medications can be caught up due to roadblocks in the supply chain further to maximize the accuracy and security of this information.
Supply Chain Management and Vendor Disputes: How do you build trust between retailers and suppliers?
Home Depot has successfully used smart contracts on blockchain to bridge the trust gap with its suppliers. How do they work?
By implementing secure and transparent records kept on a digital ledger, suppliers and merchants can communicate with each other in real-time, effectively resolving disputes much faster than before.
The increased visibility into the supply chain enabled by blockchain has also been highly beneficial, as both parties can maximize efficiency and prevent potential issues from occurring in the future.
With these measures, companies like The Home Depot have established more reliable partnerships with suppliers, leaving them more time for their most vital projects and endeavors.
International Trading and Efficiency: How can global trade become faster and more efficient?
We.trade incorporates smart contracts. The rules programmed into the blockchain autonomously manage agreements between two parties. Thanks to these sophisticated contracts, transactions on this platform decrease the time and complexity of international commerce.
Not only do these smart contracts help facilitate smoother trading between companies and banks, but they also reduce risk and friction throughout the process – making seamless global trade a reality.
|Healthcare||Supply chain management||International Trading|
|Transparent view of the temperature-controlled medication supply chain.||Suppliers and merchants can communicate with each other in real time.||Transactions are faster, more efficient, and less risky.|
|Maximizes accuracy and security.||Optimizes efficiency and prevents potential issues||Contracts automate and secure the entire process|
|-||Build reliable partnerships.||-|
Pros and Cons of Smart Contract
Smart contracts have the capability to solve some of the potential problems faced by large-scale industries such as healthcare, supply chain management, and international trading while bringing costs down and risk management up. But it is not without its risks.
Some of the potential pros and cons are as follows
|No Third-Party Required: Smart contracts eliminate the need for third parties, which speeds up contract execution.||Smart Contracts Are Permanent: Once the code is written, it cannot be changed if mistakes are made. This can be a downfall if something goes wrong with the contract.|
|Accuracy Guaranteed: Smart contracts guarantee accuracy as there is no room for manipulation.||Human Error: The programmer's coding skills are essential to the success of a smart contract. If something is coded wrong, there may not be any way to fix it.|
|Immutability: The coding language cannot be changed once executed, ensuring maximum trust and independency between parties.||Coding Errors: Loopholes in the coding means that contracts may not be carried out as intended by either party.|
|Coding Errors: Loopholes in the coding means that contracts may not be carried out as intended by either party.||-|
|Security: With each individual record encrypted and connected to the rest on an open ledger, it would be virtually impossible for hackers to tamper with even one without disrupting its surrounding network.||-|
In a world where technology is ever-evolving and blockchain’s disruption of traditional business processes is the norm, businesses need to understand how smart contracts can be leveraged.
Smart contracts are powerful tools for automation within a contract, and their uses can range from healthcare and supply chain management to international trading. The implementation of smart contracts offers cost savings by erasing intermediaries and reducing fraudulent activities.
Despite this significant advantage, certain limitations still need to be addressed as we progress in its development.