What are the smart contracts? (+ How they work on Ethereum)

Smart contracts, which are contracts written in code (usually in Solidity, the programming language of Ethereum) and contained in a blockchain, have enormous potential for multiple industries.

We have covered the basics of smart contracts in our introductory guide to fintech. Now it's time to delve into the many applications of this technology.

Smart contracts eliminate the need for intermediaries and automatically execute the terms of the contract once the requirements have been met. The indications are written in the contract to represent the possible results of the transaction (if it was completed within the required time, if it was only partially provided, etc.). And they are performed automatically based on what happens.

For example, a contract is concluded between an importer and an exporter. Written in code and contained in a blockchain, it states that the exporter must deliver to the importer 30 kilos of pomegranate by a certain date. The exporter delivers the goods on time and receives the automatic payment. Regulators use the blockchain to study the transaction and make sure that all regulations have been observed all the time.

A more common example is a vending machine. A person enters the required amount of money and enters the number of the item he wishes to purchase. Once the number is entered, they automatically receive their article. The vending machine is designed to produce a result automatically until the buyer takes the necessary steps.

Beyond the vending machines, the smart contracts are already in use. AXA, a French airline, is using an application called Fizzy to automatically reimburse passengers whose flight is more than two hours late. If a passenger is registered, a delayed flight that meets the requirements of the contract serves as a trigger event to release funds directly to the passenger. As technology improves and industries become aware of the potential, the use of smart contracts should increase.

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Smart Contract Applications

Many smart contracts are built and hosted on the Ethereum blockchain. This is ideal for the development of intelligent contracts in part thanks to Solidity, its programming language. The primary goal of Ethereum is to enable programmers to create and implement smart contracts.

The solidity is tailor-made for the creation and implementation of smart contracts. It is a scripting language similar to Javascript, but verifies and imposes the constraints integrated in the contract during compilation, not at runtime. The compilation time refers to the process of compiling the source code, which is written in a script similar to the English of a machine code program, which is binary (made of one and zero). This means that any errors in the code (contract) are detected before execution (runtime), which could cause many more problems.

Solidity is good for smart contracts because it allows you to connect and correlate contracts in many different ways. For example, you may not be able to modify a contract on the blockchain, but you can create another reference to the contract and the link between the two. Many interactions and commercial transactions are complex and require multiple contracts to function properly. Solidity was created with this in mind and provides users with the tools to create contracts that interact and refer to a base contract.

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Smart Contract Applications

Data warehouses are based on structure and clean data, while data lakes allow data to be in its most natural form. This is because advanced analytical tools and data mining software absorb raw data and turn it into useful information.

mortgages

The mortgage industry is huge, with over $ 15 trillion of mortgage debt in the United States alone starting in 2018 in the second quarter. It has a complex ecosystem of processes and intermediaries that perform tasks such as background checks and income verification. The introduction of smart contracts in the mix could save lenders over $ 1.5 billion annually in the United States alone. Lenders and borrowers could interact directly, reducing the costs associated with the origin, processing and maintenance of mortgages.

Protection of intellectual property

Smart contracts help creators protect their copyrighted works. Any part of content created is assigned to property rights according to its contributors and their parts. Whenever the content is purchased, the royalties are automatically released to the right party. The clear definition of ownership and automatic payment eliminates the ambiguities that often accompany creative ownership.

Supply Chain (Import / Export)

One of the advantages of smart contracts is the increased transparency of transactions. This is particularly useful in complicated import and export operations, involving many phases and parties. The Internet of Things (IoT) also plays a role in this, facilitating monitoring. Information collected from IoT-connected devices is transmitted to the blockchain and trigger events encoded in an intelligent contract. For example, an asset is transported from a warehouse to a ship. The ship's system sends confirmation of receipt of the article in good condition, which activates the release of payment to the manufacturer. These transactions can become extremely complicated; an intelligent contract simplifies the process.

Insurance

The goal of smart contracts is to increase efficiency and eliminate unnecessary interaction with third parties. In the insurance sector, smart contracts automate at least part of the administrative process. For example, suppose you have purchased a policy of natural disasters for your home. As soon as a disaster hits your area, it will automatically trigger the creation of a claim. This should immediately start processing, speeding up the whole process.

Advantages of Smart Contracts

Smart contracts have a number of potential advantages. The main ones include greater efficiency, greater autonomy through the elimination of third parties and greater transparency.

Transparency – Because smart contracts are created and hosted on a blockchain, the transaction record is available and (theoretically) immutable. This eliminates the ambiguities that may exist in the traces of the card. Regulators can also review transaction records during audits.

Autonomy – Intermediaries, a common aspect of the typical execution of the contract, are ultimately not essential for the execution of the terms included in a contract. Instead of third parties holding collateral deposits, smart contracts only involve the two signatories.

Efficiency – Because smart contracts automatically execute terms written in the code, they are highly efficient. Involving only the main parts saves time and resources. The automatic execution of terms also accelerates the process.

Lower cost – By trimming the third parties, transaction costs are reduced. In some sectors, such as real estate and credit, third-party fees can be high, so eliminating them can significantly reduce costs.

Drawbacks of Smart Contracts

While smart contracts have many advantages, no technology is perfect. There are a couple of drawbacks, mainly the potential for human error and ambiguity in regulation.

Human error

Once created and hosted in the blockchain, everything related to an intelligent contract is automated. However, the actual code is still written by human programmers. This means that the potential for human error is not eliminated and that contracts may contain errors.

Regulations

Or rather, the lack of this. Smart contracts, just like a variety of blockchain-based technologies, are not yet fully regulated by government agencies. Although this may be positive, it is a dangerous game, given the previous one with fintech regulation. If a governmental organization decides to lay down the legislative hammer, those who rely on smart contracts may find themselves navigating in obscure regulatory waters.

The future of Smart Contracts

Smart contracts seem to be here to stay. Save time and money for users and improve efficiency. Some estimates place the compound annual growth rate (CAGR) of the smart contract market at 80% over the next six years. While the adoption of blockchain technology has undergone ups and downs, the broad potential of technology should be sufficient to catalyze a meaningful adoption in the next five years.

Smart contracts are a part of a larger fintech ecosystem. For a deeper immersion in fintech, discover the main fintech trends in 2019.