Smart contracts and their application

Smart contracts and their application

A week ago I wrote about the technology, or rather a method of organizing blockchain databases, which the world has gone crazy about. I previously discussed the differences between bitcoin and blockchain. Now a few words about another trendy concept from the technology industry – smart contracts. They are a sign of the progress that blockchain technology is making, moving from a protocol for financial transactions to a universal tool that can implement contract terms in an automated way, minimizing the risk of errors and manipulation.

Why they’re gaining popularity

The advantage of smart contracts over traditional contracts lies in their simplicity, speed of execution and real-time updates. They are also able to eliminate centralized entities and other intermediaries that often contribute to increased risk. Smart contracts are characterized by autonomy and self-executing accuracy, so there are no delays in the execution of agreed-upon contract terms. The use of blockchain provides transparency, security and certainty of contract performance.

In short, smart contracts are better than traditional contracts because they save time and money.

According to a recent study by consulting firm Accenture, investment banks alone could save up to $12 billion a year by adopting blockchain technology and smart contracts.

McKinsey, on the other hand, estimates in its report that by 2021 the so-called “smart contract” will. The material impact of blockchain on the financial sector, that is, the savings and benefits achieved in this sector will be worth $80-110 billion.

As we know blockchain is a distributed record of transactions. It is a network of computers that have an identical copy of the database, changing the records in it based on a consensus mechanism and cryptographic rules. It does not require authorization or the intermediation of a central administrator or server. It is the technological foundation for cryptocurrencies such as bitcoin and the world’s second most popular currency, ether.

Bitcoin vs. ethereum

Bitcoin was introduced in 2009 for online payments without the need to confirm transactions through intermediaries. It dominates the field of cryptocurrencies, and its price has been growing for several months and has now reached its historical maximum – 20 thousand dollars.

Ethereum is also a cryptocurrency project (the current exchange rate of ether is around $700), although the blockchain technology used here has much greater capabilities and is used primarily for so-called “cryptocurrencies”. Smart contracts, which is the execution of automated actions according to the rules specified in the contract. Ethereum is a platform and engine for applications that can be run without the need for a trusted third party (middleman or central server). The author of the idea of smart contracts is a computer scientist and specialist in network security – Nick Szabo. He first described this idea in 1993 with drink and snack vending machines.

How smart contracts work

Smart contract is a short computer program stored in the blockchain network. Specifies the terms that all parties using the contract agree to. If certain conditions are met, certain actions are performed (if X performs action Y, perform action Z). Because a smart contract is stored on each computer in a distributed network, it must be executed on each, and it must produce the same result on each. This allows users to be confident that the outcome is correct.

To illustrate, let’s use the already mentioned example of a vending machine. If on a hot day you want to quench your thirst you have to perform the actions in a fixed order, that is, you must meet the conditions under which the vending machine will sell you the desired product, so press the appropriate button or enter the code of the drink and pay a fee, then the machine will give you a chilled drink in a can. Quick and convenient, and in a standardized, repeatable way.

Another example – sending a batch of goods to a known contractor, Arthur. You know and trust him, but the driver Andrew to deliver the package is not known to you. A driver may also be concerned about not being paid for a service rendered. So you sign a contract with Andrew which states that you will pay him when the delivery is made. Usually such a simple process involves many participants, including representatives of external companies, paper contracts or scans are necessary, printing, signing, verification, watching over payments, etc. You can simplify this process with a smart contract, defining the rules in it and establishing that the transfer for shipment is created on the day of loading and is transferred for execution when Arthur confirms the delivery. A smart contract automatically transfers payment to Andrew’s account. When a GPS tracker is attached to the pallet with the shipment, the script automatically sends a transfer to the logistics company the moment it receives a signal from the tracker from Arthur’s office.

Application areas

Blockchain technology and smart contracts open up many opportunities for decentralized companies and eliminate the need for third parties to participate.

Many startups are working on it, and large companies are testing it in closed networks so that they can interact with each other directly, without intermediaries. They are at the beginning of a journey that could lead to major changes in many areas.

E.g. The natural growth of the banking sector, as well as increased transparency for the entire financial world, shines through in the Massive Autonomous Distribution Reconciliation (Madrec) pilot. A joint initiative by UBS, Barclays, Credit Suisse, KBC, SIX and Thomson Reuters aims to simplify the process of confirming counterparty data. In other words, the Ethereum blockchain would check whether parties to a transaction pose a credit risk. Currently this process requires expensive intermediaries and results in higher fees for customers.

E-commerce players can use cryptocurrencies for payments, eliminating the need for middlemen. They can also use smart contracts to automate orders, especially for digital goods. Chinese e-commerce giant Alibaba uses blockchain to eliminate counterfeits on its platform.

There are also plans to use blockchain and cryptocurrencies for tax purposes (e.g. VATCoin), in healthcare (e.g. MediLedger Project for the pharmaceutical industry involving m. in. Roche Group and Pfizer), in regulation (e.g. This process requires expensive intermediaries and results in higher fees for clients (e.g., real estate transactions in the U.S. state of Arizona) and in company-government relations (B2G).

About the impact of blockchain technology on the advertising industry – it is said that it will have as big an impact on marketing as the internet once had – I wrote here.

Certainly with the implementation of blockchain and smart contracts, the world has much to gain. But introducing such groundbreaking solutions, significantly changing the way companies, organizations, and maybe even countries operate, requires very careful preparation and thoughtful, planned actions.

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