Transitioning to the next iteration of the internet is potentially transitioning how we experience the world around us. Smart contracts? a subset of Web 3.0? lie at the core of revolutionizing the tech world. Ethereum was the first smart contract platform that popularized the concept in no time. Post Ethereum, many other blockchains came up, supporting smart contracts on their platform.
Smart contracts have gained prominence in recent years, as they have increasingly become the go-to answer for ensuring security and accessibility for all parties involved in a binding agreement.
What are Smart Contracts?
Table of Contents
- 1 What are Smart Contracts?
- 2 How do Smart Contracts Work?
- 3 Digital Identity and Identity Management
- 4 Closing Remarks
Smart contracts are codes deployed on the blockchain platform and executed upon meeting certain predetermined conditions. Simply put, a “smart contract” is a piece of code and data stored at a particular address on a blockchain and configured to carry out specific operations.
Smart contracts intend to create autonomous contracts that cannot be interpreted by other parties or legal authorities. The code is expected to be the final arbiter of “the contract” it represents.
How do Smart Contracts Work?
Before getting into the actual working of a smart contract, it is imperative to understand that smart contracts are essentially business rules turned into a code. What differs is that, unlike business documents that need to be implemented explicitly, smart contracts automate the process.
A smart contract’s goal on a blockchain is to optimize business and trade between unnamed and recognized parties without needing an intermediary. A smart contract reduces the formality and expense associated with conventional methods while maintaining authenticity and credibility.
A smart contract is a set of codes that incorporates business logic and functions over a virtual machine like EVM embedded in a blockchain.
Smart contract use cases expand much beyond cryptocurrencies and tokens. In fact, with the advent of smart contracts, especially after the commencement of Ethereum, it has shown potential to be used in any sphere of life. Following are a few smart contracts use:
Digital Identity and Identity Management
Data became the core of businesses with Web 2.0, but only a few top companies possessed a large amount of data. With Web 3.0 and decentralized data, the user has control over his data.
From personal data to digital assets, one can securely store it on a smart contract to create a digital identity. Now, upon interacting with various platforms and services, you can decide what to share and what not to. In fact, you can transact without revealing your identity. This enhances security and reduces the probability of identity theft, breach, and mismanagement.
NFTs are one such entity built using smart contracts that seek to prevent the owner of the artwork. Art theft is quite common; NFTs present themselves as a tool, giving artists greater control over their artwork. It does so by tokenizing a piece of artwork. This acts as a copyright for artists, giving them legal protection in case of art theft.
Recommended: NFT Contract Audit Services
Supply Chain Management
Supply chains typically suffer from paper-based systems where paperwork must go through several approval channels. The time-consuming process raises the possibility of fraud and losses.
Smart contracts, as self-enforcing contracts, can operate independently of intermediaries or mediators. A smart contract operationalizing an end-to-end supply chain would not require any daily management or auditing.
Decentralized finance provides users with a new transactional experience compared to traditional finance.
These are the few financial services implemented through smart contracts.
Financial Data Recording
Smart contracts can help organizations record accurate, transparent data while improving security and efficiency. A smart contract enables organizations to maintain consistent financial data, eliminating the need to swap other documents, including invoice images. It enhances financial reporting and data integrity, resulting in increased market stability.
Loans and Mortgage
Smart contracts can also aid in the improvement of financial services such as mortgages and loans. As a result, it can link the stakeholders and ensure the entire process runs smoothly. Furthermore, it offers an error-free operation. For example, a smart contract can maintain a mortgage by tracking payments and releasing the asset when the loan is completely paid off.
Smart contracts can aid in automating administrative processes frequently frustrating for brick-and-mortar retailers. Retailers can use smart contracts to pay contractors quickly. Another option is to automate payroll administration and monitor it in real time. Retailers can also embed unique blockchain identifiers on inventory units to improve visibility across supply chains.
Probably, one of the most talked about use cases of smart contracts is the insurance sector. Based on the predetermined conditions, smart contracts can automate the whole process.
Consider a case of an accident victim in dire need of insurance. He probably cannot wait for the permissions to pass, and this is where an automatic insurance release through a smart contract is a boon.
The smart contract facilitates the policy and ensures that it has all necessary documentation, including reports and driving records. If the smart contract is properly configured with the appropriate guidelines, documents, and data collection methods, it can execute itself shortly after the accident. Furthermore, smart contract execution is based solely on the data collected, ensuring that no fraud occurs during the process.
There are countless incidents in the health sector of wasted medicine and materials that could have found use in other medical facilities but were not received due to a lack of a system that tracks their availability. Additionally, smart contracts are an immutable way of maintaining temper-proof health records. In fact, this can aid in availing blood, organs, and other essential things available but are far from being accessible due to lack of records.
Currently, building a project and raising funds require a lot of paperwork and time, both of which are growingly valuable assets in a digitized world. On the other hand, using a smart contract to complete the same process is as simple as clicking a button and signing up for a wallet.
Furthermore, different parts of an asset can be tokenized so that other people can hold and own portions. They can sell them on designated markets at any time.
Smart contracts have the potential to create a secure voting environment, reducing the risk of voter manipulation. Each intelligent contract vote is ledger-protected. These are extremely difficult to decode due to the encryption. Smart contracts may also boost voter turnout. There is no requirement to travel to a polling station with an online platform powered by smart contracts.
One of the most explored areas of Web 3.0 is the gaming sector. Play-to-earn games have become increasingly popular in the space for a few years. In such games, smart contracts manage transactions, including buying and selling gaming tools, waging war, breeding avatars, and more.
With smart contract implementation increasing to varying degrees across virtually all industries, smart contracts are a trend we are getting accustomed to. Although nowadays, a number of hacks due to smart contract vulnerabilities are catching attention. Hundreds of hacks have already stolen billions of dollars worth of cryptos. Hence, it is imperative to cater to the security aspect of smart contracts, which makes smart contract security audits an essential step to be followed before mainnet deployment.