5 Benefits of Using Smart Contracts and Their Problems

Traditional paper-based agreements are slow and costly to implement, as well as easy to fake and tamper with. Aside from significant costs of printing and storage, signing contracts is a long process which is not transparent, accurate, and flexible. Using blockchain smart contracts removes the legal assistance or the courts from the decision-making process so all involved parties can negotiate without a middle-man.

Since the innovation is developing rapidly, there's a lot of confusion regarding its purpose and implications. In this article, we will have a closer look at the way smart contracts affect the efficiency of business management and explore the key smart contract benefits for modern organizations. You will see why data storage security is important and how it helps to reduce the operating cost.

A smart contract is a digital protocol that is created to automatically verify the way the actors of an agreement comply with it. The inability to tamper with it is one of the most important characteristics of a smart contract since it increases the validity of the document.

A smart contract has several distinguishing characteristics that set it apart from traditional agreements:

• •Self-verification enables the digital protocol to automatically verify whether both parties are complying with their contractual obligations
• •The contract cannot be tampered with, meaning that data, which was initially agreed upon at the time of the contract, cannot be changed
• •Self-execution helps to ensure that as soon as the rules are satisfied, the output process is generated immediately

This type of deal is often likened to a vending machine. Right after you pay for an item, you receive whatever it is that you ordered with no further steps involved.

Although the math behind smart contracts is complicated, the logic behind how smart contracts work is relatively simple. Essentially the process of execution has three steps:

Step 1: Contract Codification

The contract is written in computer code. The agreement is codified within the blockchain. Note that the parties of the contract are anonymous, although the agreement is in the form of a public ledger.

Step 2: Auto-Execution

A trigger event occurs and a smart contract auto-executes. As soon as it matches a specified date or condition the agreement will be executed without any human supervision in a manner specified in the initial terms.

Step 3: Regulatory Verification

Regulating institutions can refer to the contract confidently since the document is transparent and tamper-proof. Meanwhile, the original actors of the agreement do not have to worry about revealing their identities.

Agreements are one of the oldest known ways to formalize the agreement between two parties protecting both. However, lately, traditional paper-based contracts have a list of vulnerabilities since they are easy to bypass, take a lot of time to agree upon, and are expensive to create and store.

Naturally, with the evolution of technology, more and more organizations adopted blockchain smart contracts. The differences between the new and old forms are significant:

Smart contracts have an endless range of smart contract applications across industries. Business, e-commerce, education, healthcare, finance, and other industries would stand to benefit tremendously from the adoption of this innovation. Here are the frontrunner industries when it comes to implementing smart contracts.

E-commerce Applications

In the field of e-commerce, smart contracts would help to create an atmosphere for risky purchases. For example, if a customer is checking out on the website, then the payment for the purchase is stored on the public ledger. A seller will get access to the money when the product is shipped and delivered safely.

Asset Management Solutions

Smart contracts will come in handy when processing and creating mortgage loan agreements. As a rule, mortgage contracts are multi-layered and complicated. That is why companies hire multiple middle-men so as not to miss out on significant details.

Smart contracts make the process easier for the loan applicant and the property seller alike:

• •They help cut down intermediaries, reducing the amount of time required to sign the contract and the cost of elaborating a working agreement
• •Being able to store all the details of the agreement in one place securely makes it easier for the parties to refer to the agreement in future negotiations

Insurance Industry

The insurance industry is quite slow when it comes to automation. That is why processing claims can drag out for weeks. By implementing smart contracts, insurance companies can improve the number of claims processed, reduce unnecessary operating costs and improve customer satisfaction.

The ability of smart contracts to execute automatically will increase the efficiency of processing natural disaster claims. Such agreements enable you to be specific about the specifications in terms of the amount of damage and a respective compensation. Paper-based documents do not allow such a high level of detail.

Employment Agreements

The employees of the multinational corporations often feel unprotected since there is no way for them to win a court case against an employer with considerably more money and human resources. After smart contracts are adopted, a job candidate, as well as the employer, will only be able to agree to the conditions that will protect the personal rights of both parties and ensure fair treatment.

Later on, the contract will be executed on its own. There is no way for the employee to change it or read the document differently than it was originally meant to be read. Smart contracts create a valuable record database where the salary and responsibilities of every employee are documented in detail increasing the transparency within the workplace.

Intellectual Property Protection

Being able to claim ownership over something when the content is being redistributed continuously all over the web is a challenge modern creators have to deal with. Now that many new forms of content are rising, videos, online posts, and others, regulatory bodies have to come with ways to trace intellectual property ownership efficiently.

As smart contracts are tamper proof, they are a way to set one's ownership over a piece of content in stone. Also, such an agreement can automatically detect the breach of conditions and auto-execute the countermeasures.

Supply Chain Management

The supply chain is a complex domain with multiple parties involved. That is why it is particularly difficult to monitor what is happening every step of the delivery process, to know the cause of possible errors and to find a person guilty.

Smart contracts monitor and record compliance with the agreements for each party involved. In case, a vendor or a car driver fails to follow the instructions he had previously agreed to, it will be recorded in blockchain.

Other than increasing transparency and promoting trust between the vendor, the seller and the end client, smart contracts increase the visibility of delivered goods. Since the condition of a delivery can be checked by the blockchain in several stages this data can be used to locate a lost item.

Smart contracts are one step ahead of the conventional agreements when it comes to enforcement costs, convenience and applications. These agreements can be adopted universally, for any type of transaction in multiple domains.

Whether you are a public office official or a business manager, you will be able to reap huge benefits out of adoption, both in the short and the long run.

Time-Efficiency

Time-efficiency stands out as a primary benefit. Elaborating, agreeing and enforcing a paper-based contract usually takes weeks. The process is dragged on because of the reliance on multiple intermediaries and huge feedback loop. Using blockchain smart contracts requires no legal compliance and no need to reach out to lawyers since they do not require the intervention of the court to be enforced.

Security

Security represents another major advantage. As smart contracts use data encryption, it is one of the safest methods of ensuring that no third party can modify the document. Thanks to high level security, smart contracts have great potential implications for international relations and political agreements.

Precision

Precision is increased greatly. A smart contract is more flexible and takes into account a higher level of detail than its paper counterpart. Such an agreement can process a list of elaborate conditions and select the right scenario for execution out of dozens of others. Also, there is no human error in the execution of the agreement. Thus, the odds of variances from the agreement are reduced.

Money Savings

Money savings are huge. Smart contracts do not require the parties to hire intermediaries for negotiations. They are easier to store, they don't need printing, they do not take up physical space.

Transparency

Transparency is improved dramatically. When elaborating on a smart contract, both parties get to go through the littlest details. Hence, there is no chance of missing out on important points and misunderstanding each other. Thanks to its tamper-proof feature, a smart contract generates more trust from both parties that are signing it.

Although the concept has been found a mere few years ago, companies have already begun the adoption process. Several promising examples in various industries prove how much potential this technology can have.

Banking Sector

A Swiss bank realized how empowering the implementation of blockchain in finance can be. The company adopted a micro contract which is totally auto-executable and generates a reliable payment stream for unbanked people. A so-called smart bond technology is tamper proof and risk free and helps improve people's trust in the banking system.

Music Streaming

A streaming platform uses blockchain-based smart contracts to prove an artist's ownership of the track. Thanks to responsive tagging, it takes a couple of minutes for a creator to register as the producer of the track and get royalties any time the music is streamed.

Technology Partnerships

One smart contract creator has gained recognition from a major tech company, which announced an official partnership this year. The tech giant's interest in smart contracts proves the tremendous impact the technology is about to have on the way we build and enforce legal agreements.

Healthcare Data Protection

In the healthcare industry, protecting patient data from leaks and ensuring the transparency of the treatment are major challenges. Normally, it takes an expensive bureaucratic system to ensure doctor-patient confidentiality. One healthcare provider documents patient data as an encrypted smart contract that will ensure no one will tamper with charts and a patient can access his health history freely. All the data is stored on a connected blockchain network physicians all over the world can access to treat people efficiently.

Supply Chain Tracking

Another company implemented smart contracts for recording supply chain transactions via a blockchain-empowered know-your-client procedure. As all the stages of delivery are recorded and encrypted, everyone involved in the logistics and execution of the supply chain will have a safe database to refer to in case of a misunderstanding within the team.

Despite the advantages, adapting smart contracts inevitably raises the issue of regulations. When it comes to paper-based documentation, the compliance is monitored by a regulatory body. A similar system would need to be followed for blockchain contracts. For instance, if a car owner signed a contract with an insurance firm, a trusted service has to send an alert when an insurance case is detected to enforce the contract.

To make sure the reliability of blockchain, teams are encouraged to create a chain of arbitration organizations that pay a regular guarantee fee and are refunded in case a regulatory body makes a wrong enforcement decision.

For example, if a car owner got into an accident, ten independent representatives are called upon to determine if the insurance can cover the accident. If nine out of them agree that a given case should be covered while one is stating the opposite, then the latter is fined for fraudulence.

Such an approach provides an incentive to the regulatory decision-makers to be honest and transparent and is known as the oracle system.

Smart contract adoption is one of the trendiest and potentially impactful innovations of the decade. They are versatile, can be used to regulate small and large scale agreement and span across multiple industries.

Prolonged Contract elaboration processes, lack of proper enforcement and high storage costs are all solved efficiently once a smart contract is implemented.

Although it is hard to say with confidence that smart contracts will completely replace contract-based law as we know it, it is clear they are going to become widespread and help business owners and public officials push the frontier when it comes to reducing the amount of time, money and effort needed to reach a common ground between the involved parties.

The technology offers solutions that benefit any kind of organization. It ensures high security, time-efficiency, precision, and transparency, as well as allowing cost reduction. In most cases, products only have advantages from smart contract integration.

Development and implementation usually takes a few weeks for existing projects. Experts can help to design contracts that will correspond fully to logic in business and will be the most beneficial for the project. It usually takes a maximum of two to three minutes to sign a smart contract compared to the two weeks it takes for traditional agreements.

The integration of this technology is a massive change in the way that agreements are created, executed, and enforced in many different sectors. As more and more organizations recognize the benefits, the adoption rates will only rise, fundamentally changing the landscape of contractual agreements and business operations.