Smart contracts are computer programs that are built on a blockchain network. They are a collection of codes and have a specific address on the blockchain. They operate as programmed and are not controlled by users. Users can interact with a smart contract through transactions. Smart contracts define and enforce rules through their codes and are irreversible once executed.
Smart Contract Adoption
Smart contracts have various applications because they can execute agreements when certain conditions are met. One of the fundamental applications of smart contracts is that they ensure transactions occur between two parties, such as the disbursement of DeFi loans or payments or the purchase and delivery of goods. For example, you need some materials from a supplier. You can set up payment conditions through smart contracts, and the supplier can also use them to set up shipments. Payments can be done upon shipment or delivery depending on your agreement with the supplier. Some industries where smart contracts can be used include DeFi lending, supply chain management, healthcare, real estate transactions, and trading.
Smart Contract Benefits
Smart contracts are self-executing, meaning they automatically execute a function if pre-defined conditions are met. They operate in a trustless manner, eliminating human dependency in business transactions. There are many benefits to Smart contracts that include.
- Transparency: Smart contracts are created and operated on blockchains, and transaction records are transparent and publicly available. Auditors can also review transaction data.
- Process autonomy: Intermediaries or third parties are the norm in many business transactions, such as acquiring a loan, buying real estate, or tracking shipments. The Smart contracts only involve the concerned parties, without intermediaries.
- Process efficiency: Smart contracts are efficient as they automatically execute terms. The automatic execution of terms and conditions are written into the code speeds up the process.
- Low transaction cost: With no intermediaries, smart contracts lower costs significantly. Companies can lower transaction costs by eliminating third parties.
Smart Contract Drawbacks
No technology is perfect, and even Smart contracts have some disadvantages.
- Human error: Smart contracts are automated after their creation. However, Smart contract codes are written by humans, meaning there is potential for human error and can contain mistakes.
- Regulations: Smart contracts are part of the blockchain ecosystem and, as such, are not fully regulated.
How do Businesses Use Smart Contracts?
Many users would assume that smart contracts are usually used to support crypto transactions, like dealing with NFTs. However, they can also be used in any application that can be automated. For example, they are used in finance to disburse DeFi loans, pay interest to lenders, and facilitate international payments. They can have applications in government agencies to improve efficiency and transparency. They can also be deployed for digital identification. Smart contracts can also be deployed to make the voting systems more secure and less susceptible to foul play. Voter turnover is usually low due to inefficient systems leading to long queues. The voting process can be shifted online using smart contracts, potentially increasing the number of voters.
In the healthcare space, blockchain can store health records with a private key. Only specific users can be granted access to health records. Medical research can be conducted securely using smart contracts. The other applications of smart contracts in the healthcare sector include monitoring drug trials, ensuring regulatory compliance, and managing supplies.
Supply-chain management is affected by paper-based systems. Paper-based processes also increase the risk of fraud and loss. Smart contracts can eliminate these risks by offering a transparent digital version of supply chain processes. They can be used to automate most tasks and also for payments.
Smart contracts have the potential to transform the financial world. As mentioned before, they can be used to facilitate cross-border payments and disburse DeFi loans. Other financial applications include insurance claims, payment routing, and bookkeeping. They enable all parties to participate in the decision-making process securely and transparently. They can also be used in trade clearing. Once the trade settlements are calculated, funds can be disbursed.
Read more: What is Ethereum
Smart contracts are computer codes that execute pre-defined terms. It automates processes that otherwise would require human intervention and would need parties to trust each other. They are a digital alternative to paper-based processes and offer advantages like increased efficiency, low transaction costs, and data security. They have use cases in multiple types of businesses, as shown above. However, it is vital to perform thorough research and gain enough knowledge before deploying Smart contracts into a business.
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