Falling profits and tightening profit margins have forced businesses like banks and government departments to adapt to digital technologies like the blockchain. According to Markets and Markets, the global blockchain market size is expected to grow at a CAGR of 67.3% from USD 3.0 billion in 2020 to USD 39.7 billion by 2025. The need for simplifying business processes and integrating supply chain management applications with blockchain technology is driving the blockchain market. Applications and industry uses are increasing, making blockchain a must-have skill in today’s technology landscape.
Blockchains cannot be implemented without the smart contract, the digitally permissioned contract that executes on the blockchain digital network built and maintained by distributed computers. Smart contracts automate the execution of an agreement so that all parties to the agreement can be assured of the result, without loss of time or security breach.
What is blockchain?
A blockchain is a digital ledger of transactions that is mirrored and distributed across a network of computer systems. It is a shared, immutable ledger for recording transactions, tracking assets, and building trust among the participants. Assets can be anything tangible or physical like a parcel of land or cash or intangible like intellectual property, or copyright. Assets must symbolize value and be capable of being tracked and traded on a blockchain network.
Blockchains are digital systems of recording information in a way that it cannot be changed, erased, or altered thus making it near impossible to hack or cheat the system. Each block in the chain contains information and includes a number of transactions. Each time a new transaction occurs, a record of that transaction is added to the ledger of each participant.
Why blockchain is popular
Businesses and governments have everyday transactions that require utmost security, transparency, and speed. Information needs to be stored and shared securely, and speedily. The blockchain infrastructure helps to deliver that information because it is stored on an immutable ledger accessed only by permissioned members of the network. Because it has eliminated middlemen and is highly secure, blockchain technology is rapidly gaining traction, particularly in industries that value security and immutability like banking and financial services. To speed transactions, a set of rules called a smart contract is stored on the blockchain to be executed automatically on certain preconditions.
What is a smart contract?
A smart contract refers to any contract in electronic form. With the advent of the blockchain, the term has acquired a different connotation. A smart contract is a self-executing contract, an algorithm that runs on the blockchain and implements an agreement when the electronic clauses trigger processes according to the terms. The contract executes on its own by a network of computers when the predetermined conditions are met
Smart contracts can be considered as decentralized applications that implement business logic once the stipulated terms are matched. They facilitate various tasks, processes, or operations that have been programmed for the response. Smart contracts automate the execution of an agreement so that the participants in the blockchain can know the outcome without any loss of time or the involvement of an intermediary. As there is no external participation, smart contracts are the most secure digital applications. The execution of smart contracts automates workflows and further triggers the next action when the terms are met.
The programs underpinning smart contracts use a variety of architectures for developing, distributing, managing, and updating the same. They are stored as part of the blockchain and other distributed ledger technology, or integrated into payment systems like cryptocurrencies.
It runs on a specialized virtual machine with blockchain or distributed ledger following “if/when” statements written into the code. Once the smart contract executes an action, the blockchain is updated. Thus, the transaction or action becomes irreversible, with only the parties mentioned in the contract and granted permission able to see the results. A smart contract can contain innumerable stipulations for the contract to be executed. However, the participants must agree upon the terms and rules that govern the transactions, explore exceptions, and determine how the transactions are symbolized on the blockchain.
How does smart contract work
Smart contracts are programmed by developers. Business teams work with developers to define the outcomes to be achieved and the terms which trigger the response to predefined events. Examples of events are authorization of payment or release of insurance claim upon the filing of the claim. The logic for the contract is programmed by the developers in a smart contract writing platform. After the program is tested, it is vetted by a security expert. Upon approval, it is deployed on an active blockchain or other distributed ledger infrastructure. The smart contract is configured to respond to event updates from a cryptographic live data source /sources. It implements only upon automated conditional performance of contractual obligations. A contractual obligation is triggered while receiving the right mix of events from the data source/s only when contractual obligations are met.
To use a smart contract, the transaction that is to be executed is sent to a network of peer nodes, where a special algorithm vetoes the digital signatures of contracting parties. Upon validation, the contract starts executing.Smart contract applications
A variety of industries benefit from blockchain-based smart contracts. Automation of healthcare payments using smart contracts helps to mitigate overbilling and avert fraud. Settlement of insurance claims fast-track the tedious process of claim settlement and helps insurers. The storing of data on vehicle maintenance, accident, and ownership history vide smart contracts, can benefit both, the automobile industry and the insurance industry. Recording the ownership of music in the blockchain and deploying a smart contract benefits the owner as royalties are paid when the music is used commercially (conditions are triggered). With smart contracts the ownership of a piece of real estate, its documents, and contracts can be directly embedded into the blockchain as a permanent digital record.
Benefits of smart contract
Smart contracts lay down the terms irrevocably and provide clarity to the contracting parties.
Transparency
The terms are written in code instead of legal verbose and accessed by the agreed data source. As mirror copies of the contract are stored in the blockchain, the terms, and amendments if any can be verified by the participants only using a consensus algorithm. This enables viewing and tracking of the contract status in real-time, thus enabling transparency to all parties.
Irreversible and secure
As contracts are updated in the blockchain immediately upon execution or transaction, they are irreversible and cannot be changed or altered. The secure nature of smart contracts is its most redeemable feature.
Autonomous
Smart contracts are autonomous. They begin executing the moment an agreed event occurs when they are placed on the blockchain. The transactions agreed upon are performed automatically without any additional approvals.
Cost-effective
Smart contracts are cost-effective, as the services of no intermediaries are involved, only the contracting parties. Lower operating costs is why smart contracts are replacing traditional legal contracts for long-term agreements.
Speedy
Smart contracts execute instantly the moment the stipulations are matched. This means the high processing speed can fast-track businesses.