The rapid growth of blockchain technology and cryptocurrencies has altered the financial industry in recent years, resulting in establishing a new crypto-economy.
Verified Market Research has published a recent report, “Smart Contracts Market.” According to the report, Global Smart Contracts Market was valued at USD 144.95 million in 2020 & is expected to reach USD 770.52 million by 2028, increasing at a CAGR of 24.55 % from 2021 to 2028.
New decentralized applications have emerged with smart contracts that do not require a trusted third party. Smart contracts are computer protocols that allow different parties to negotiate and agree without involving a third party.
Despite the positive aspects of smart contracts, security threats, weaknesses, and legal concerns continue to impede their implementation.
In this post, we present a comprehensive analysis of blockchain-based smart contracts, as well as some of the current opportunities and obstacles facing smart contract adoption.
What are Smart Contracts?
Smart contracts are simply programs that run when certain conditions are met and are maintained on a blockchain. They’re generally used to automate the execution of an agreement so that all parties can be sure of the conclusion right away, without the need for any intermediaries or time waste.
Like any other contract, a smart contract sets out the conditions of an agreement. Unlike a traditional contract, a smart contract incorporates the rules into code on a blockchain, like Ethereum.
From loans and insurance to logistics and gaming, smart contracts allow developers to create apps that take advantage of blockchain security, reliability, and accessibility while providing complex peer-to-peer functionality.
What are the Essential Components of Smart Contracts?
Smart contracts are made up of a few key components:
- Signatories – Two or more parties use the smart contract and digital signatures to give their final ‘go forward’ on the proposed terms.
- Subject – The subject of the agreement applies solely to the smart contract’s context.
- Specific Terms – The smart contract’s precise terms. Smart contracts must be mathematically stated and programmed to be compatible with the blockchain system.
How do Smart Contracts Work?
A network of computers can run activities when specific conditions are met and validated.
The activities may involve transferring payments to the appropriate parties, registering a vehicle, providing alerts, or issuing tickets. The blockchain updates after completing each transaction. This means the transaction is unalterable, and the results are only visible to those with access rights.
Participants must agree on:
- The representation of transactions and relevant metadata on the blockchain.
- Decide on the “if/when…then…” rules that apply to those transactions.
- Investigate all possible exceptions, and
- Design a framework for resolving disputes to set the terms.
Developers can then write the smart contract, but firms that use blockchain for business increasingly provide templates, web interfaces, and other online tools to make smart contract construction easier.
Smart Contracts and Blockchain
Through smart contracts on the blockchain, anonymous parties can conduct transactions and agreements without the need for a central institution, external enforcement, or legal system. They rely on transparent, irrevocable, and traceable transactions.
Because all data recorded on the blockchain is immutable and safe, it is the ideal setting for smart contracts.
Applications of Smart Contracts
Smart contracts are interesting to stakeholders because of the ease of sharing and accessing. Smart contracts can automate, calculate, and organize payments, and carry out their terms and conditions automatically.
They can alter a wide range of industries, and they are currently doing so in fields as diverse as finance, real estate, healthcare, insurance, and even elections.
Here are a few applications of Smart Contracts:
1. Getting Rid of Costly Trade Finance Errors
Smart contracts can help you avoid making costly mistakes. These contracts’ capacity to automate procedures and refine calculations also aids in lowering work hours.
- Smart contracts will enable fundamental improvements in the infrastructure and processes of the financial services industry.
- By 2022, banks can save $15-20 billion per year on costs associated with “cross-border payments, securities trading, and regulatory compliance.
- Using DLT to eliminate the middlemen to manage a mortgage-issuance process.
- They believe that distributed ledgers will become the dominant method of managing large volumes of transactions.
2. Keeping Track of the Details of a Real-Estate Property
This industry uses smart contracts to document the ownership of property. Removing the need for lawyers or brokers improves transaction speed and efficiency. The seller controls this process.
Smart contracts provide a more transparent and cost-effective option for property title management. Smart contracts keep track of a property’s history, location, and other pertinent information for title assessment. They assist in preventing fraud by using tamper-proof and secure encrypted codes.
A Sydney seaside property would cost roughly $2.3 million, which is out of reach for most people, including myself. Assume the owner is willing to tokenize the property and sell it on a public exchange in order to attract more investors. Five customers have completed the buying orders, resulting in a total of $460,000 in tokens. They now jointly own the home after executing a multi-signature smart contract that is fully executed on the blockchain network.
With a multi-signature smart contract, new investors can be sure that all future decisions will be made when a majority of owners agree.
It may sound absurd, but it is something that could be built to help automate the process of getting started investing in real estate at a lesser cost than the usual method.
3. Securing Medical Data
Blockchain is helping many healthcare organizations to deliver reliable automation and up-to-date security measures. Hospitals are popular targets for cyber hackers because they store a lot of sensitive data.
Data breaches have affected even prominent names in the industry, such as UCLA Health, resulting in the compromise of 4.5 million patient details.
In this context, ensuring secure patient data sharing between healthcare providers is crucial to upholding care standards. Patient data can be securely kept on a blockchain using smart contracts, which can only be accessed with the patient’s private key.
Patients can trust that their medical professionals will always have access to the information they require and that their information will be kept secure in this manner.
4. Improving the Ease and Integrity of Elections
Blockchain voting systems could become a dominant technology for elections in the future. Blockchain voting systems could increase accessibility, encourage increased voter engagement, and speed up the process of tallying and reporting results by making voting safe and accessible through digital methods.
Smart contracts would be able to verify voters’ identities, preventing multiple ballots from being cast, which is a common target for election hackers.
5. Minimizing the Claim Frauds in Insurance Industry
The insurance business spends millions of dollars each year processing claims. Fraudulent claims also waste money.
Smart contracts improve claim processing by incorporating frequent error checks and assisting in administering policies from individuals or organizations. Consumers will save money due to faster processing times, including premium rates.
According to Lloyd’s of London, Insurance companies will be able to fill up the gaps in coverage that occur with the underwriting process, as they’ll be able to manage risks from corporate buyers much better.
Benefits of Smart Contracts
Smart contracts have numerous advantages over traditional contracts in various industries. They are, in theory, more efficient and reliable than traditional contract law, and they are also supposed to provide greater security because all acts are documented and validated.
As a result, they can be able to save money and time while increasing transparency.
1. High Processing Speed & Efficiency
- Once a condition is met, the contract is immediately executed.
- Smart contracts are digital and automated, so they do not require paperwork.
- It does not take time to correct errors, which are common when completing paperwork by hand.
Smart contracts can automate cross-organizational business operations.
This reduces many operational costs and resources, including the staff who monitor the status of a complex process that runs in response to conditions across organizations.
3. Transparency and Trust
As there is no third party, transaction records are transparent among participants. There is no need to worry about changes in the information.
- The encryption mechanism of blockchain makes it difficult to attack.
- The entire chain of entries before and after each item on a distributed ledger makes it virtually impossible for hackers to change one record on it.
Smart contracts can also use blockchain ledgers and other distributed ledger technologies to keep a permanent record of all activity linked to the execution of complex procedures.
It also offers automated transactions, which eliminate the possibility of human error and ensure contract execution accuracy.
Challenges with Smart Contracts
Smart contracts can potentially pose several obstacles, which can limit their widespread adoption.
1. Human Errors
Smart contracts, like paper contracts, are vulnerable to fraud due to human error. Individual coders develop the code for smart contracts.
As a result, a smart contract code has a (high) possibility of having numerous errors. They can be intercepted, delayed, and corrupted. Some errors have proved to be extremely costly.
2. Lack of Engineering Expertise
Smart contracts will require a new kind of encryption and forensics expert to check software code and translate it into human-readable form as they become more common.
Making flawlessly functional smart contracts necessitates a great deal of engineering knowledge. Experienced coders are also hard to come by and are expensive.
3. Regulatory and Legal Issues
Various legal and regulatory issues are preventing smart contracts from becoming more widely used. Smart contracts do not contain a proper legal status. They are not subject to any official government regulations.
4. Enforceability and Interpretation
If there is a disagreement about whether a smart contract adequately memorialized the parties’ intentions or whether one party has breached the contract, the parties can still go to court or use alternative dispute resolution.
The enforceability of smart contracts will vary depending on contract law in different regions.
5. Issues of jurisdiction
Smart contracts also present questions of jurisdiction. They don’t live in a single place, but rather exist in several places at the same time.
Existing laws are jurisdiction-based. Differences in laws between countries can be extremely problematic, resulting in inconsistencies in rights and obligations, and a lack of clarity about the repercussions of contract violations.
Platforms Using Smart Contracts
Ethereum was the first smart contract platform in the world, and it remains the most popular among developers today.
Ethereum’s smart contract platform offers standardization, security, and support. Deploying smart contracts and Dapps on the platform has proven to be quite simple thanks to elegantly worded regulations, well-defined development criteria, and the platform’s scripting language, Solidity.
In terms of developer count ( ~ 200,000), Ethereum outperforms all other smart contract platforms, making its development community one of the most vibrant and dynamic.
2. Hyperledger Fabric
Hyperledger Fabric is a permissioned blockchain, which means that participants’ identities are transparent and require authentication. This makes Hyperledger particularly appealing to businesses that deal with sensitive data and must adhere to data protection requirements such as the GDPR.
Stellar is the only non-Turing complete platform on this list, which means it’s only appropriate for basic smart contract use cases like initial coin offerings (ICOs) or simple escrow contracts.
In terms of speed, cost-effectiveness, and transaction security, it is one of the greatest platforms for money exchange because of its limited reach. Stellar outperforms any other smart contract platform.
The smart contracts of Stellar function using multi-signature, batching, and time limitations. In a nutshell, Stellar could be the appropriate choice for a corporation looking for a simple but successful smart contract solution.
Top software developers from Intel, Dropbox, and Qualcomm invented Solana in 2017.
Its goal is to address scalability concerns. Solana has achieved a record-breaking transaction throughput of 65,000 transactions per second.
In other words, rather than being grouped in blocks, each transaction exists within its block and is an input to the next transaction.
It’s possible to see which transactions were the first and last in a given block this way.
Solana is one of the quickest platforms on the market, which makes it appealing to Dapps that require immediate outputs.
It’s a Wrap!
There is a long way to go before smart contracts are the standard. It will take time to replace over 50 years of complex processes and contracts with standardised, enforceable ones.
We are heading in the right direction with the increased acceptance of blockchain and Bitcoin.
If you’re planning to adopt a smart contract in place for your company, reach out to us, and we’ll conduct an audit to help you discover impediments and possibilities for deploying smart contract development services for your company.
With roll up sleeves, dive in and get the job done approach, it was in the year 2010 when Sahil started Parangat Technologies. Emphasizing a healthy work culture and technology-driven company, he has successfully created a workplace where people love to work and live. He is a software engineer and a passionate blockchain enthusiast.