Like it or not, blockchain technology will force organisations to diversify and look for new functions in the near future. Because blockchain technology is trust-free and not controlled by any authority, it is disrupting the way we as businesses and people, transact together.
Blockchain is about pure maths that nobody can tamper with and that’s one of the main reasons for the level of scepticism around this technology to date. Smart contracts however, are becoming more and more popular within businesses because they allow a trust-less or trust-free transaction to be executed autonomously once a certain action happens.
A computer scientist and Bitcoin precursor, Nick Szabo, first used the term smart contract in 1997. Smart contracts are actually tiny computer programs based on ‘if A then B’ logic, which are executed when certain conditions are met. It sounds like a no-brainer so one might ask, what’s so smart about these contracts?
Guarantees of fairness and transparency
Thanks to the blockchain technology all parties involved in a smart contract can be confident that the contract is carried out in a 100% neutral and non-biased way. Whatever terms have been agreed before signing will mean that the contract will be implemented in the future with no risk of fraud, manipulation or unauthorised modification.
This is how it works: in the case of Ethereum, blockchain developers write smart contracts in programming language such as Solidity and then publish them on the Ethereum network. Published smart contracts have a public address. Users can trigger them by sending some cryptocurrency to their address for example, just as they would if they wanted to make a regular transaction, along with some extra data. The same computers that support the Ethereum network and verify the transactions also execute smart contracts. Since the Ethereum network is decentralised, it guarantees that smart contracts are implemented fairly and transparently. No single node can change the terms and the results of a contract because it would contradict other computers in the network.
Smart contracts could disrupt every business in any sector
Smart contracts also avert the need for notaries, lawyers and other third parties by automating the process through undeniable mathematical proof. They also provide immutable and transparent registration. As opposed to centralised systems where contracts are stored in walled gardens and secured by organisations that tax their clients for the services they offer. Everything a smart contract performs is stored on the blockchain making it unchangeable and available to everyone.
With full automation and the fact that businesses don’t need to rely on third parties, smart contracts have the potential to disrupt pretty much every business we can possibly imagine. For example in the case of insurance, imagine a farmer whose crops depend on certain weather conditions such as rain to flourish; with an automated smart contract the farmer could simply use the insurers’ website, specify the parameters of his crops by location, type of plants, etc. and the website service would have access to current and historical weather data from this location, so would be able to forecast the probability of drought, storms or any other weather conditions that could destroy the crops.
Based on this information the farmer would pay the insurance fee and sign a smart contract. If the weather destroyed the crops the insurance company would automatically see the evidence of that in the weather data and the smart contract would be automatically triggered to compensate for the farmers’ loss. Similar cases could be built around driver’s insurance too whereby the driver would only be paying for their insurance cover while the car is on the move; so if you’re not driving – you’re not paying.
Eliminating issues of trust are central to smart contracts
Smart contracts can be also used in crowdfunding and to support corporate social responsibility too, where fundraisers only receive the money raised if the campaign reaches a certain level of funding; if the goal is not reached the funds are refunded to the supporters.
This new way of conducting business eliminates any trust issues between the parties involved in an agreement because it is completely transparent and scalable. Smart contracts have already started reshaping businesses in supply chain, healthcare, education, finance and in many more areas of our lives. The mass adoption of crypto-currencies will further contribute to new business models whereby thanks to smart contracts, devices will be able to transact with one another without human interference; for example, a car will be able to pay for its parking.
This new business model known as m2m (machine to machine) combined with the utilisation of smart contracts will also make space for new businesses to be developed. While smart contracts can run independently, they can also call upon each other, just like procedures and functions in any traditional program so one smart contract may trigger another smart contract when it completes or as part of the course of its execution.
By creating interconnected smart contracts, developers can create decentralised applications (DApps) and complete programs that run on blockchain. Operating in decentralised, ‘trustless’ (or trust-free) systems will speed up all sorts of transactions, boost confidence in business and in many ways it will make our lives as humans much easier.