Smart contracts are pieces of code that take advantage of the blockchain technology and serve to facilitate, verify, or guarantee the fulfillment of agreements or contracts. The concept of smart contracts was first formulated by Nick Zabo in 1996
. He called the “smart” contract “a set of promises digitally formulated, including protocols in which the parties fulfill these very promises.”
Ever since smart contracts have captured the minds of many visionaries. An example is Vitalik Buterin, a Russian-Canadian programmer and one of the co-founders of Ethereum
- the most popular decentralized platform of smart contracts based on the blockchain. But the technology is developing, and rapidly, and now there are dozens of other blockchain projects capable of creating “smart” contracts.
According to specialists in the field of John Rome, Yang Chu and David Shatsky, “smart contracts represent the next step in moving the blockchain technology from the financial transaction protocol to a universal utility,” writes Deloitte Insights
. “They (smart contracts, ed.) Are part of software, not contracts in the legal sense. At the same time, “smart” contracts extend the blockchain's ability to preserve financial transaction records, which automatically guarantees the fulfillment of multilateral agreements. They use a computer network, which, in turn, relies on agreed protocols to ensure that the conditions laid down in the contract code are met in the correct sequence. ”
The benefits of smart contacts
Smart contracts have a wide range of potential areas of application and, moreover, offer a number of significant advantages for enterprises and organizations against the background of generally accepted tools:
- Speed. Smart contracts are, in essence, pieces of code that are executed in accordance with pre-specified conditions. Since smart contracts are by their nature autonomous and self-sufficient structures, they are processed as quickly as the computing power of the blockchain network in which they operate allows. Compare this with traditional contracts, the execution of which depends on intermediaries, who, in turn, may have certain working hours and, most importantly, performance restrictions, that is, they can perform a limited amount of tasks. When considering the issue from this position, it becomes obvious how smart contracts can be useful for enterprises and businesses in their quest to be more productive.
- Accuracy. Making mistakes is a part of human nature. Some of them are serious, some are not very good, but when it comes to business, they all somehow lead to the loss of expensive time and other resources. Smart contracts always work flawlessly, exactly as it was programmed. They leave no room for inaccuracies that may arise due to the human factor, provided that no errors were made at the programming stage.
- Unchanged. Since smart contracts operate on an immutable decentralized blockchain network, their results cannot be falsified for the sake of undue gain. This property of “smart” contracts is of great importance not only for business, but also for the public sector, which we will discuss below.
- Cost Since smart contracts require much less human participation and exclude most intermediaries, the cost of their conclusion is much lower (relative to existing practices - Ed.). In the future, typical “smart” contracts may become common practice for anyone who can download and use them for their intended purpose. Approximately the same situation is now observed in the sphere of using standard legal forms created by licensed lawyers in order to save clients time and money. And you can see for yourself if you wish.
Examples of the use of smart contracts
Below are a few options for using smart contracts that can be directly or indirectly used by a business.
Consideration of each insured event requires a huge number of man-hours, which translates into high commissions for customers and multi-week expectations of closing a single lawsuit. Smart contracts allow insurance companies to present their insurance policies in the form of a banal computer code and transparently indicate what circumstances initiate the process of proceedings.
In a similar contract for car insurance, for example, in case of an accident, all known variables can be rigidly fixed, such as the type and age of the client’s vehicle. Also available for processing variables, such as the speed of the vehicle at the time of the accident.
“The smart contract reduces not only the administrative costs associated with the execution of the necessary formal procedures, but also ensures transparency and confidence in the process regulated by it for all parties involved, for example, for supervisory authorities. This is achieved thanks to the very nature of the smart contracts within the blockchain, ”explains the German blockchain-company Draglet
As you know, in the era of the Internet, it is difficult to enforce copyrights and rules for the distribution of products of intellectual work. On the one hand, there are millions of artists and content creators who should be rewarded for their work, but this does not happen. On the other hand, countless people would like to support content creators, but they cannot do this. This is due to the fact that they either do not know how and where to legally purchase content, or refuse to deal with various intermediaries who establish exorbitant margins and extract super-profits. In fact, this process can be automated with a simple smart contract.
The technology allows all content creators to independently publish or distribute the fruits of their labor knowing that they are guaranteed to receive their payments on royalties, the amount specified in the smart contract governing this process.
Smart contracts can automate compliance procedures that require the subsequent destruction of records. "The Uniform United States Trade Code (UCC) (advisory act representing the unification of US trade law, ed.) Allows automatic updating, issuance or provision of collateral, which allows the use of smart contracts in this area," the report says Smart Contracts: 12 Use Cases for Business & Beyond
, prepared by the Smart Contracts Alliance with Deloitte Insights.
Using smart contracts to keep records, enterprises and organizations will be able to free up resources for other, more important tasks. The global benefit from their use in terms of increasing productivity is immeasurable.
At the 2017 conference on financial cryptotechnologies and information security, Patrick McCorry, Ph.D. from the University of Newcastle, United Kingdom, presented his vision of secure voting using smart contracts. It is worth noting that this conference is the main international forum for discussing research in the field of information security for commercial structures.
The McCorrie project is called the Open Vote Network, developed in collaboration with Siamak F. Shahandashti and Feng Hao. The creators describe the Open Vote Network as "a decentralized, self-destructing Internet voting protocol with the maximum privacy of voters achieved through the use of blockchain technology." They also note that “The Open Vote Network is adapted for holding elections right in the conference room through the use of Ethereum-based smart contracts. Unlike the previously proposed e-voting protocols using the blockchain, this is the first implementation that does not rely on a certain “trusted authority” to carry out the counting of votes or to organize the protection of voter's confidentiality.
We still have a lot of widespread problems that we can solve with smart contracts. Considering the pace of development of information technology, it is clear that the time of traditional contracts is coming to an end. When smart contracts become common practice, business and enterprises will benefit from it. It should not be ruled out that their widespread adoption can generate completely new business models and will change the world.
New areas of practical application of “smart” contracts appear almost daily and, as stated in the
Harvard Business Review publication
, the blockchain technology can become a new basis for registering all transactions, which in turn will generate a new economic model with a minimum transaction cost.
Modern enterprises (including small ones) can get different benefits from the use of smart contracts in each individual case, and we are just beginning to understand how this technology changes the rules of the game. Although the leaders of the IT industry are already aware of the benefits of using smart contracts and are aware of the potential benefits for their enterprises (this is about full transparency, saving money and time, increasing trust in the business environment, and so on), most of them prefer to stay in to the side. The main reason for this behavior is the lack of a full-fledged technical expertise and there is no solution to this problem so far. At the same time, the private blockchain, which is built by the Jincor team, will allow businesses of any size and industry to easily access the full potential of the smart contract tool without any legal, technical or operational risks.
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