Why are Smart Contracts so important?

• 30 August, 2022
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Why are Smart Contracts so important?

Smart contracts, like blockchain technology, are of great interest to businesses. They aid in the resolution of mistrust between parties and business partners with a number of advantages for a variety of industries, including reduced unnecessary costs and time expenditure while increasing transparency.

What are smart contracts?

A smart contract is a contract that automatically executes the terms of the agreement between buyer and seller written directly into a computer code. The code and agreements it contains are disseminated across a decentralised blockchain network, and every transaction is trackable and irreversible, where its execution is controlled by code. 

Smart contracts enable trusted transactions and agreements between dissimilar, anonymous participants without the requirement for a central authority, legal system, or external enforcement mechanism. In spite of the fact that blockchain technology has come to be viewed largely as the basis for bitcoin, it has gone well beyond this function. 

Smart contracts are kept on the blockchain. It is incredibly difficult to corrupt the system, as it would require huge processing power to overrule the entire network, which not everyone can accomplish. A smart contract digitally streamlines, verifies, or enforces contract negotiation. 

Additionally, it facilitates reliable transactions without the need for a third party. After first being proposed by Nick Szabo, who originated the term in 1994, smart contracts have lately garnered interest due to the emergence of multiple ERC standards and the proliferation of platforms that facilitate a decentralised way to run code. 

Among the essential characteristics of a smart contract are: 

1. Autonomy 
2. Decentralisation 
3. Auto sufficiency 

Autonomy signifies that once a smart contract is activated, the person who initiated the transaction is no longer required to participate in the process. Due to the decentralised nature of the system, the presence of intermediaries is not required for the signature of contracts.

Uses of Smart Contracts

Even if, with such autonomy, the possibilities are unlimited, the primary use cases of Smart Contracts are defined by how we choose to employ them. The following are examples of smart contract applications:

Insurance

Due to a lack of automated administration, the processing and payment of an insurance claim can take months. This is just as bad for insurance firms as it is for their clients, as it results in administrative expenses, surpluses, and inefficiencies. When specific conditions occur, smart contracts can automatically initiate a claim, thereby streamlining the process. For instance, if your automobile is involved in an accident while you are traveling, the smart contract would recognise this and initiate the claim process. To establish the exact amount of compensation, specific facts such as the extent of the damage, the car number, and the place where the incident occurred might be stored on the blockchain.

Supply chain administration 

Management of the supply chain involves the flow of goods from raw materials to completed products. As products move through the supply chain, smart contracts can record ownership rights and establish who is liable for the product at any particular time.

Protecting intellectual property 

By registering ownership rights in a decentralised blockchain system, smart contracts can ensure that royalties reach the proper beneficiaries. A distributed ledger would record all property rights. 

Digital Identity 

Smart contracts can enable individuals to own and control their digital identity, which includes their data, reputation, and digital assets.

Financial Data Recording 

Smart contracts allow financial institutions to capture accurate and transparent financial data. 

Mortgages 

Smart contracts can automate mortgage contracts by connecting the parties automatically, making the process seamless and less prone to error. When the debt is repaid, the smart contract can automatically handle payment and remove liens from land records.

Also Read: Guarding Against Common Types of Data Breaches in Singapore

Advantages of smart contracts

Some advantages of smart contracts are:

Advantages of smart contracts

Some of the good things about smart contracts are: 

1. Security – As the distributed ledger is impregnable and resistant to tampering 
2. Disintermediation – Parties don’t have to go through middlemen to enter into agreements. 
3. Near real-time execution – Since it happens almost at the same time for all parties on all participating computers once the necessary conditions are met. 
4. Transparency – Builds trust because all participants in the blockchain network can see the logic and information in the contract.

Challenges involved in using Smart Contracts

Putting smart contracts into place comes with its own set of challenges. Some of these, if not dealt with, can slow down its adoption: 

• Confidentiality: Even though businesses want to be open, they don’t want to put their contracts on the blockchain because they may contain competitive strategies. A blockchain platform like Hyperledger is permission-driven and allows parties to enter into a private smart contract that is only visible to the people involved in the contract. However, Ethereum, which is also a blockchain platform, does not have an option for private smart contracts. So, businesses will have to choose their blockchain platform based on what they need. 
• Accuracy: Since a smart contract is a computer programme, each term and condition of the contract must be coded. There is a chance that the coder will misunderstand or forget something, which could leave holes in the contract. I think that the more we use smart contracts, the more we’ll find these holes and figure out how to close them. 
• Unreliable Inputs: This could lead to fake contracts or contracts that don’t get done. When something goes wrong with a traditional contract, the parties can go to court. Unfortunately, this is not possible with smart contracts, whose legality is still being debated. 
• Bugs and mistakes in the code: This could cause disagreements and make it hard to figure out who made the mistakes and how to fix them. They could also have effects that no one saw coming. This is exactly what happened in June 2016, when a hacker used a flaw in the code of a smart contract built on Ethereum called the Decentralized Autonomous Organization (DAO) to steal 50 million Ether, a digital currency similar to bitcoin. 
• Rogue Contracts: Smugglers, terrorists, hackers, and other bad people could use the self-execution and anonymity of smart contracts to do illegal things.

Conclusion

Smart Contracts have the potential to introduce radical change in the way businesses operate, and in the massive adoption of it, human errors may be present in the way organisations implement them. As these are one of the recognized challenges faced today, luckily, there’s Privacy Ninja, which offers the most affordable Smart Contract Audit. 

Also Read: Singapore’s PDPA Act 2019: All you need to know