Smart contracts are digital programs stored on blockchain networks that automatically execute when predetermined conditions are met. This straightforward yet powerful concept is revolutionizing various industries.
From automating financial transactions to managing supply chains, the use cases for smart contracts are expanding rapidly as more people recognize their potential.
Smart contracts were introduced in the 1990s by cryptographer Nick Szabo, who described them as "a set of promises, specified in digital form, including protocols within which the parties perform on these promises."
The launch of Ethereum brought this concept to life, enabling secure, transparent, and efficient digital agreements.
In this blog, we'll give you a quick overview of what smart contracts are and how they work. Then we'll describe real-world use cases to showcase their versatility and impact across different sectors.
Traditional Contracts vs. Smart Contracts
Traditional contracts, like rental agreements, require third-party oversight for enforcement and dispute resolution. For instance, a tenant must pay rent on the first day of each month, and if disputes arise, a governmental body must intervene.
Smart contracts eliminate intermediaries by automatically enforcing terms once conditions are met. Think of a smart contract like a vending machine. When you insert a dollar, you get a co*ke. The machine follows built-in rules, similar to if-then statements in code. When one party fulfills their obligation (inserting a dollar), the resulting action (dispensing a co*ke) is triggered. This automation ensures that agreements are executed precisely and without the need for third parties.
Why Are Smart Contracts Useful?
Smart contracts offer several advantages:
- Elimination of Middlemen: By removing intermediaries like brokers or lawyers, smart contracts reduce costs and increase independence.
- Speed and Efficiency: Automated execution ensures fast, disruption-free transactions.
- Trustless System: No need to trust other parties, as the system is secure and transparent.
- Immutable and Secure: Blockchain technology ensures data integrity and security, as transactions are immutable and encrypted.
Smart contracts are revolutionizing industries such as Finance, Real Estate, Healthcare, Insurance, and Elections. They automate tasks, calculate payments, and execute terms instantly upon meeting conditions, saving time and enabling multi-party consensus validation. This technology enhances the way agreements are made and enforced, providing unmatched efficiency, security, and transparency across various sectors.
It all sounds great. But understanding smart contract is easier when we look at real-world examples. So let's dive in.
1. Trade Finance
Smart contracts streamline and enhance trade finance by automating processes and reducing the need for intermediaries. They ensure transparency, security, and efficiency in transactions. Here’s how they are used:
- Automated Payments: Trigger payments upon meeting specific conditions, reducing delays.
- Document Verification: Automatically verify and authenticate trade documents.
- Shipment Tracking: Track goods through every stage of the supply chain.
- Dispute Resolution: Resolve disputes efficiently through predefined rules.
These capabilities help mitigate risks, lower costs, and improve the speed of trade finance operations.
Santander InnoVentures reported on the benefits and opportunities that come with using blockchain in finance. They believe that distributed ledgers will become the preferred choice for managing volumes of transactions. These savings are expected to amount to $15–20 billion a year by 2022.
2. Real Estate
Smart contracts can be used to record property ownership of any structure. They can also optimize transaction speed and efficiency by reducing the need for lawyers or brokers, allowing sellers to take charge of the process.
Smart contracts have also been used in the industry to automate and secure processes like:
- Property Transactions: Automatically execute property sales when conditions like payment confirmation are met, reducing the need for intermediaries.
- Lease Agreements: Automate rental agreements and payments, ensuring timely transactions and reducing disputes.
- Escrow Services: Securely hold funds until all terms of a real estate deal are fulfilled, releasing them automatically upon completion.
- Title Management: Record property ownership and transfer titles securely on the blockchain, enhancing transparency and reducing fraud.
Blockchain thought leader Rob Massey highlights the ability of smart contracts to allow for a more transparent and cheaper alternative to property title management. Title defects can get in the way of transfers which result in legal fees. However, smart contracts keep track of a property’s history, location, and all other important details that will be needed for title assessment. They also help avoid fraud through encrypted codes which are tamper-proof and secure.
Similarly, the mortgage industry is burdened by costly intermediaries and lengthy procedures. Smart contracts offer a solution by automating agreements between lenders and borrowers, ensuring clear terms and conditions like proof-of-funds and payment plans. This technology validates mortgage transactions autonomously, eliminating the need for lawyers and other third parties. By streamlining processes and reducing costs, smart contracts can modernize the mortgage industry, making it more efficient and accessible for all parties involved.
3. Healthcare
Hospitals are primary targets of cyber criminals since they hold a wealth of sensitive information. Even big names in the sector like UCLA Health have been victims of data breaches, amounting to 4.5 million patient records compromised. More healthcare institutions are using blockchain to provide reliable automation and up-to-date security measures.
Patient data is a key focus. Ensuring the secure sharing of patient data across healthcare providers is critical to maintaining standards of care. Smart contracts allow patient data to be stored securely on a blockchain, where it can only be accessed with the patient's private key. In this way, patients can ensure that their medical providers always have access to the information they need, and that their information is secure.
Smart contracts can significantly enhance clinical trials by automating the management and execution of trial protocols. They ensure data integrity and transparency, streamline patient consent processes, and automate payments to participants. This technology helps maintain compliance with regulatory requirements, reduces administrative overhead, and accelerates the overall trial process, making it more efficient and trustworthy.
Streamlining billing and insurance claims in healthcare is another focus. By automating the submission and processing of claims, we can reduce the need for manual intervention. This automation can significantly lower administrative costs, which currently consume about 15-20% of healthcare spending in the U.S. By ensuring accurate and timely processing, smart contracts help minimize errors, expedite reimbursem*nts, and improve overall efficiency in the healthcare claims process.
4. Elections
Blockchain voting systems could be the future of elections. By making voting safely and conveniently available through digital means, Blockchain voting systems could widen accessibility, encourage greater voter participation, and speed up the process of tallying and reporting votes. Smart contracts would be able to validate voters’ identities to prevent multiple casted votes, which is a frequent goal of election hackers.
Additionally, smart contracts can streamline voter registration, verify identities, and count votes in real-time, leading to faster and more reliable results. A significant statistic to consider is that blockchain technology can reduce election costs by up to 90%, according to some studies, making the process more economical and accessible.
5. Insurance
Millions of dollars are spent every year on processing claims in the insurance industry. Even more money is wasted due to fraudulent claims. Smart contracts strengthen claim processing through frequent error checks, helping administer policies from individuals or organizations. Shorter processing times will result in lower costs for consumers – including premium rates.
Lloyd’s of London confirms that insurance companies will also be able to fill in the gaps in coverage that come with the underwriting process, as they will be able to manage risks from corporate buyers much better.
Beyond processing claims, smart contracts can improve insurance by automating policy management, underwriting, and fraud detection. They can streamline the issuance and renewal of policies, ensuring compliance with terms and reducing administrative tasks. For instance, automated underwriting can lead to faster policy approval times and more accurate risk assessments.
An interesting statistic: Implementing blockchain technology in insurance could save the industry up to $10 billion annually by reducing fraud, improving efficiency, and lowering administrative costs, according to PwC.
6. Legal Contracts
Just as e-signatures transformed document processing by replacing paper and mail with digital efficiency, smart contracts are set to revolutionize traditional contracts. These digital agreements automatically execute transactions or agreements when specific conditions are met, eliminating the need for intermediaries. This automation not only accelerates legal processes but also significantly reduces legal fees. By making business transactions faster and more cost-effective, smart contracts offer a new, efficient way for parties to do business, mirroring the digital shift seen with e-signatures.
7. Fan Engagement and Rewards
How to make smart contracts work on behalf of creators is a fun challenge of the Web3 economy, as they’re sure to create new monetization opportunities. Companies that manage bands, games, and online creators will deploy blockchain technology to bring accountability to streaming and create stickiness with fans.
An artist may issue a piece of their work as a non-fungible token (NFTs) that can be sold on a secondary market. When new transactions occur, a smart contract can programmatically pay royalties back to the original creator ensuring they share in the increased value of their work.
8. Music Rights and Revenue
Smart contracts have the potential to revolutionize the music industry by automating and streamlining royalty payments and rights management. Emerging artists often rely heavily on streaming income, and smart contracts can ensure they get paid instantly and fairly. By programming contracts to automatically distribute royalties according to pre-set percentages for artists and record labels, the process becomes transparent and efficient.
Platforms like Tune.fm exemplify this innovation, using tokenized economies to pay artists directly for every stream with JAM tokens and allowing them to mint and sell exclusive NFTs to fans. This not only increases earnings but also fosters a more direct and engaging relationship between artists and their audience.
9. Retail and Small Business Operations
Smart contracts can significantly enhance administrative efficiency for brick-and-mortar retailers. By automating payment processes to contractors, digitizing payroll administration, and providing real-time tracking, retailers can reduce burdensome tasks. Additionally, using blockchain identifiers on inventory units improves supply chain visibility.
In this sector, XMoney enables seamless cryptocurrency payments for retailers, helping them save on transaction fees and attract tech-savvy customers. This platform offers retailers a way to manage digital payments efficiently, while consumers enjoy the convenience and security of using cryptocurrencies for everyday purchases. This innovative approach helps retailers streamline operations and improve their bottom line.
10. Digital Identities
Smart contracts play a crucial role in managing digital identities by providing a secure and decentralized framework for identity verification and management. The benefits of using smart contracts to verify and manage people and users include:
- Enhanced Security: Identity information is stored securely on the blockchain, preventing unauthorized access and ensuring data integrity.
- Increased Privacy: Users have control over their data, sharing only necessary information with third parties.
- Automation: Smart contracts automate the verification process, reducing manual intervention and increasing efficiency.
- Interoperability: Seamlessly integrates across multiple platforms, allowing users to maintain a single digital identity.
The evolution of digital identities and the ability to automate verfication will have impact across industries, with some of the first and most prominent use cases being in:
- Finance: Streamlines KYC processes, reduces fraud, and improves compliance.
- Healthcare: Protects patient data and facilitates secure access to medical records.
- E-commerce: Enhances user verification and safeguards against identity theft.
- Government: Improves the management of public records and citizen services.
According to MarketsandMarkets, the blockchain identity management market is expected to grow from $90.4 million in 2018 to $1.93 billion by 2023, highlighting the increasing adoption of this technology.
Integrating Smart Contracts in Enterprises: Opportunities and Challenges
The rise of blockchain technology, especially Ethereum, has made smart contracts viable by leveraging immutability, decentralization, and cryptographic security. These features ensure transparent and secure execution of agreements without intermediaries.
However, integrating smart contracts into enterprise ecosystems presents several challenges:
- Compliance: The lack of comprehensive regulation for smart contracts and blockchain technology exposes organizations to scrutiny. Establishing robust corporate compliance policies can mitigate risks related to blockchain attacks and human error.
- Data Integrity: Automating data processing with smart contracts increases the risk of errors due to faulty data input. Ensuring data integrity is crucial to prevent inaccuracies and maintain reliable outcomes.
- Logic Hacks: Smart contracts can be exploited if they contain poorly coded logic, compromising the entire blockchain ecosystem. Regular audits and secure coding practices are essential.
- Scalability: Public blockchains struggle with scalability, requiring significant computing resources to handle simultaneous transactions. Techniques like sharding and proof-of-stake consensus algorithms are being developed to address these issues.
- Interoperability: Variations in data processing standards between companies can impede smooth transactions on enterprise blockchains. Well-coded smart contracts can enhance consistency and facilitate business communication.
- Talent: The complexity of blockchain technology demands skilled developers to conduct security audits and evaluate measures. Organizations need experienced blockchain professionals to ensure robust implementation and maintenance.
By addressing these challenges, organizations can fully leverage the potential of smart contracts, transforming their business processes with enhanced security, efficiency, and transparency.
Put Smart Contracts to Work for You
Smart contracts have diverse applications, including peer-to-peer transactions, product development, supply chain management, and stocktaking. By leveraging blockchain platforms, businesses can create smart contracts that automatically enforce business logic, leading to significant time and cost savings. While there is room for improvement and innovation, the growing adoption of smart contracts highlights their intended benefits of transparency, accountability, and efficiency.
In this Tech Tuesday, Anastasia Lalamentik, Full Stack Engineer at Kaleido, walks through how to write a smart contract and goes over related concepts like gas fees, the Ethereum Virtual Machine (EVM), the block explorer, and the Solidity programming language. The video is a great place to start if you want to learn more about how smart contracts can improve the way we work.
For more information, schedule a consultation with one of our solution architects. We can help you outline the processes or transactions you want to automate and design smart contracts to handle the work efficiently.
