Smart contracts are getting a lot of attention in connection with the topics surrounding blockchain. Find out why this is the case and how smart contracts are relevant for companies in this blog article.
Anyone who has ever bought a house, an apartment or a plot of land knows how much effort this process can involve. In addition to the buyer and seller, at least the land registry office, usually a bank, the notary and the responsible tax office are involved in the purchase process. Smart contracts make processes like these much easier with the help of blockchain technology.
Smart Contracts are based on the Blockchain and have its advantages: speed, security & automation options.
What may take several weeks to complete can theoretically be done in a matter of minutes using Smart Contracts. All relevant information on land charges, building permits, tenure, loan agreements and tax obligations can be stored in the Blockchain – tamper-proof.
Actions such as changing the land register entry can also be carried out automatically as soon as the money has been transferred to the seller. The blockchain provides the basis for smart contracts, which have the potential to transform the entire economy.
Smart Contracts and the “If-This-Then-That Logic.”
The way smart contracts work is most easily explained by the formula “If-This-Then-That” – which is also where the name of the startup IFTTT comes from. This equation stands both for a basic principle of programming and symbolically for automation. If a certain condition is met (“if this”), then a predefined action (“then that”) takes place automatically.
Smart contracts also work according to this principle. As soon as a certain condition is met – an ordered good arrives at point A – an associated action is automatically triggered – the good is paid for.
Trust is technologically built into the system
The advantage of smart contracts over normal transactions: They allow people to trade with each other who do not know each other and, accordingly, have not yet built-up trust. The secure technology behind the smart contracts, i.e., the blockchain, establishes or replaces trust.
Not only trading platforms such as eBay or Amazon, but also services such as those offered by Airbnb or Uber could be completely converted to smart contracts. The advantage: transactions processed via smart contracts are more efficient, more secure, and cheaper.
Areas of application beyond payments
Most people think of Bitcoin and other cryptocurrencies when they hear the keyword blockchain. Yet while secure, cashless payments are the most prominent application area for blockchain technology, it is only one of many possible uses.
Blockchain providers such as Ethereum are already demonstrating that cryptocurrencies and smart contracts go hand in hand because most payment transactions are directly or indirectly related to fulfilling a contract. Direct order transactions that take place fully automatically between machines or things on the Internet of Things can thus be planned and executed clearly and securely.
The charm of smart contracts is their efficiency & security
In this respect, Smart Contracts are a logical complement to the development of currencies such as Bitcoin, Ether or Lif. In a way, they are the real charm of the technology. But smart contracts can also fulfill important functions detached from payment transactions.
Important documents such as credentials and certificates can be made forgery-proof and fulfill a role in the application process or tenders. Complex processes such as public construction projects in which the EU, federal government, states, or cities are all involved can thus run more efficiently.
Smart contracts in states, administrations, and organizations
Contracts in general play an important role in official life: Marriages can already be concluded via blockchain, as can sales contracts, land register entries, notarization, or inheritance. In addition, blockchain and smart contracts play an important role in automated governance in companies and public authorities.
By embedding the decisive control authority of contracts and processes in the technology, fewer errors occur, and the processes run in a more controlled manner.
Future application scenarios for smart contracts
But other official processes can also be digitized, and elections could be made absolutely forgery-proof. This is a major advantage over past practices, especially in the age of cybercrime, election interference and fraud.
Another effect of smart contracts is to reduce fraud in other areas. For example, in the billing of prescriptions to health insurance companies. Damages caused by so-called “air prescriptions” now amount to billions of dollars. In this process, prescriptions are billed without any actual sale of drugs taking place. If prescriptions were designed as smart contracts, fraud would be virtually impossible.
Numerous companies are already relying on the blockchain and smart contracts
In addition to banks and insurance companies, the first large corporations such as Lufthansa or SAP are already testing blockchain technology and smart contracts. But the use of smart contracts can also be interesting for smaller companies and medium-sized businesses. Especially in areas where many critical processes converge, a smart contract brings advantages such as:
- More security
- increased effectiveness
- partial automation of processes
- reduction of administrative costs
The use of smart contracts can be particularly worthwhile in complex processes, such as cooperation between several companies in the automotive sector or in an international context.
Venice Swap is a smart contract of Ethereum EC20 chain.