Recently there has been a lot of discussion within the cryptocurrency community regarding the ways smart contracts will change business operations in the future. Smart contracts are not only a future substitute for paper contracts because there are more unique applications as well.
Smart contracts will continue to be used in cryptocurrency transactions as they are often the only insurance we have to trust the deliverances of physical goods or services, however, the value of smart contracts goes far beyond business transactions.
Why use smart contracts?
At their core, smart contracts are strings of computer code which are written to function on specific cryptocurrency blockchain protocols. Cryptocurrencies are programmed to behave in a very specific manner with one or more economic actors and this makes smart contracts possible. Each condition of the contract being created is directly coded into the digital agreement. As the conditions of the smart contract are met or broken the contract self-executes requiring no recourse from outside sources or third parties.
An essential component to smart contracts is that the computer code which makes them up is decentralized and secure by storing the information using blockchain technology and/or encrypted peer to peer networks. These network technologies are incredibly resistant to external manipulation since the information isn’t stored in a centralized location or server. This greatly reduces the risk of contract manipulation, information theft, and other hacking efforts.
This is another benefit of using distributed networks to secure information as the integrity of the system is not reliant on a single point of failure. Distributed networks offer lower security and operation costs than traditional data storage methods since no single entity is responsible for managing the storage of information.
It’s common for secure and private data to be kept in centralized servers that companies, the government or other entities have direct control over. We have learned that disasters like fires or earthquakes can cause hardware failure that threatens the safety of private information. We have also seen many examples of companies abusing their control of user data or simply getting hacked.
Smart contracts have the ability to eliminate the need for third-party intermediaries and costly court battles because the conditions of the contract are predetermined and unchangeable. Since there are no human intermediaries needed to enforce the contract there are no bills to pay to contract lawyers or other middlemen if the deal goes sour.
For people that previously feared to enter business agreements due to a trust void, smart contracts increase confidence that agreements will be carried out correctly and they outline the consequences incurred when the agreement is broken. This factor is especially significant for small business owners wishing to enter the international market, where it is normally costly, risky and technically difficult to trust a business party on the other side of the planet. In the event a problem arises judicial systems can be ineffective, require a large time and money investments, or be non-existent.
What are some applications of smart contracts?
A simple use case for smart contracts is an individual that wishes to buy or sell physical goods anonymously using cryptocurrency. In this case, neither party knows the identity of the person they’re doing business, with the exception of some infrastructures using decentralized reputation score systems where trust can be earned.
How do you trust the other party if you don’t even know their name or location? What if you pay but they don’t send the goods?
An integral element of cryptocurrency is anonymity, but there needs to be a way to prevent purposeful wrongdoing and a way to rectify cheating situations. The beauty of smart contracts is that they can automatically enforce the consequences of deal-breaking. For example, a smart contract can require the seller to make a cryptocurrency deposit which is held until the buyer verifies they have received the good or service.
BitBay’s client software has built-in smart contract templates that provide the groundwork for safe cryptocurrency transactions to occur. Our smart contracts use a double deposit escrow system that requires both parties to make an agreed-upon deposit during the initial contract setup. The deposits can be set at equivalent or different amounts for the buyer and seller and at any amount desired. Once the contract is accepted if either party cheats in the transaction process the other party can decide the contract is not complete, which results in both parties losing their deposit. This removes the incentive to act dishonestly during the deal, therefore, reducing counterparty risk.
Using smart contracts when buying and selling houses or property can reduce the need for real estate agents to complete lengthy paperwork and the need for mortgage companies to be used as a payment intermediary. Payment installations can be automated including the accrual of late fees or penalties. City documents can be released automatically as the buyer and seller move along each step of the home-buying process, simplifying and accelerating completion of the sale.
In the commercial sector, smart contracts can improve inventory and supply chain management. The process of providing a service (or the process of creating/shipping a product) can be outlined with a smart contract, with each step of the process clearly defined via code. As each step is completed a corresponding cryptographic transaction takes place to release information, funds, or documents while simultaneously updating the status and conditions of the smart contract. Smart contracts will birth a new continuously-smooth system of instant verification in the product-creation and shipping process, or during each step of a service with multiple conditions.
Smart contracts also offer a platform for information to be shared in a more organized manner. This could standardize information recording and management procedures in fields like medicine, engineering, research, and finance. Currently, it is very difficult for researchers to coordinate and compile in real time with other external researchers while eliminating risks like information or praise theft. Blockchain technology can allow contributions (and who made them, when, etc) to be recorded in an unchangeable ledger.
Smart contracts can also decentralize sensitive information that we wish to securely distribute to others, for example sending your health history to your doctor. This is the motivation behind the creation of digital identities. Imagine securely storing your personal information in a secure decentralized network. This can allow you to have your address or other information verified securely and non-visibly during an online transaction. Once the required information has been received and verified it is no longer accessible to the other party. This eliminates the risks of companies storing your information in their servers and prevents humans from ever seeing your private data.