There’s a lot going on with blockchain that can be complicated and overwhelming for the average consumer.
We hear the term smart contracts quite often in the cryptocurrency and blockchain space, but not everyone in this world understands what it is.
That’s ok! Our goal at CryptoMeNow is to make blockchain and cryptocurrency easy for everyone to understand.
In this article, we’ll be going over what a smart contract is and the use cases for smart contracts.
What the heck is a smart contract??
Simply put, a smart contract is the same as a normal contract traditionally put together by a lawyer that performs a certain action based on an outcome or action.
Put differently, smart contracts are programs that execute exactly as they are set up to by their creators.
In a simple example, Bitcoin investors can send 15 bitcoins to a friend on a certain date using a smart contract.
In this case, the user would create a contract, and push the data to that contract so that it could execute the action.
All smart contracts are currently built on Ethereum.
Let’s quickly go over what smart contracts can do:
Smart contracts can –
- Only execute when a certain action is triggered. For example goals are met for a fundraising event.
- Manage agreements between users, say, if one buys insurance from the other. This includes automated background checks.
- Store information about an application, such as domain registration information or membership records.
It quite straight-forward and you don’t need to over think smart contracts. Just think of it as a technology version of a regular written contract.
This photo does a good job giving an overview of how smart contracts work
Benefits of using smart contracts
One of the primary requirements of a smart contract is to record all terms and conditions in explicit detail.
This is important because a lot of traditional contracts can result in errors.
The terms and conditions of these contracts are fully visible and accessible to all relevant parties. There is no way to dispute them once the contract is established.
This facilitates total transparency of the transaction to all concerned parties.
3. Clear Communication
The need for accuracy in detailing the contract results in everything being explicit. There can be no room for miscommunication or misinterpretation.
Thus, smart contracts can drastically cut down on efficiency lost to gaps in communication.
These contracts run on software code and live on the internet. As a result, they can execute transactions very quickly. Think about purchasing real estate and how it can take 60 days to close on a house. With smart contracts, we can have everything completed in minutes.
Smart contracts are built on Ethereum with the highest security and encryption in mind giving both parties a peace of mind.
6. Go green
Businesses across the globe are becoming increasingly conscious about their impact on the environment. Smart contracts enable the “go-green” movement because they live and breathe in the virtual world.
Smart contracts is still in it’s early days, but it’s making big moves. Industries like banking, insurance, healthcare, and real estate stand to benefit from adopting this technology. These industries are built upon a system of clear rules, algorithms, and quantifiable terms of engagement.
Real life use cases and examples for smart contracts
More and more industries are starting to adapt to blockchain technology.
To make it easier for everyone to understand smart contracts, it is important that we provide some real life use cases and examples for the usage of smart contracts.
Imagine that you need to sell a house. It’s a rather overwhelming process which includes a lot of paperwork, communication with different firms and people as well as a high levels of various risks.
You would need to hire a lawyer to craft certain contracts, hire a listing agent, and many more.
There’s a clunk amount of paperwork involved in a simple real estate transaction. Not to mention the amount of time that is needed before you actually get the money in the bank.
Not to mention, you have to go through an escrow company and that just adds up to the mess.
With smart contracts, all of this is automated and the middle man is cut out, allowing people to sell and buy homes in a matter of days.
Four major banks in this world started using blockchain smart contract technology for analyzing held information such as individual trade details and counterparts risk metrics.
The four banks that’s leveraging smart contracts are – Bank of America Merrill Lynch, Citi, Credit Suisse and J.P. Morgan.
This is also the reason behind why Ripple (XRP) exist. It aims to allow banks to process quick transactions in the matter of seconds.
Even Sberbank, a Russian government-controlled bank, in a country which has been notoriously anti-cryptocurrency, is starting to test smart contracts.
As smart contracts mature and adapt to the market, we should be seeing more financial transactions being process using smart contract technology.
Healthcare is another industry that can be quite promising for smart contracts. The process of filing out medical records and sorting through files can all be done through smart contracts.
A healthcare blockchain would significantly reduce inefficiency and waste in the healthcare ecosystem.
A lot of the time, health payers end up paying claims, and then end up working on identifying inaccurate payments and reconciling over- and under-payments. This is a lot of manual work that is involved, but all of this can be changed with smart contracts.
Another use case for healthcare would be the following example:
The providers have contracts set up with payers so that every time a patient receives care, an entry is made in the blockchain. The contract executes claims reimbursements from the payer to the provider and also transfers a certain amount of co-pay from the patient to the provider.
This makes the reimbursement process a lot easier for co-pay related payments.
Next up on our list is agriculture. There’s a lot of ways smart contracts can be implemented in this industry, but an easy to understand example would be food safety. Food safety is the number one concern that people care about.
This also seems to be the area where the most work has already been done because there is already clear vested interest from both parties.
Think about why people purchase food from the farmers market? Because they know it’s local grown or organic. The problem with stores is that it is not guaranteed that it is organic.
But what if we could make this happen at scale? Meaning, no matter where you bought your food, you knew not only where it came from, but when it was harvested and processed, and even who produced it.
Downsides with smart contracts
Just like anything in life, everything comes with a pro and con. This applies to smart contracts and blockchain in general as well.
For instance, the code that makes up the contract has to be perfect and contain no bugs. This can lead to mistakes and, sometimes, to such bugs being exploited by hackers.
Another thing that you need to consider when putting together a smart contract together is the cost of development. The production cost could end up costing you more than hiring someone the traditional way to put together a written contract.
Smart contracts are an extremely young technology, but it shows the potential that blockchain can provide for the world.
With such promise, the technology will surely be perfected over time. Undoubtedly, smart contracts will become a major part of our society.
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