Smart Contracts: “What and Why?”

● Effectiveness of contracts in present society.
● What and Why of smart contracts.
● Smart contracts: Use cases

Smart Contracts have become most talked about topic about DeFi (decentralized finance) in current era, but still there is a lot of unawareness among the people about smart contracts and their benefits to them. The objective of this article is to address the “What” and “Why” question associated with smart contracts.

According to Nick Szabo in 1996, an expert in digital currency and digital contracts, smart contracts can be defined as, “promises made in digital form comprising of set of rules that all the parties have to comply with and fulfill their end of obligation”. Since then there has been great advancement in the technology available for the support of smart contracts, it provides an essence to the questions of “What” and “Why”? Let’s understand how they work in real world.

Effectiveness of contracts in present society

As per contract law, a contract is an act or promise made in exchange for an act or promise. For example, “A consumer promises grocery store manager a certain sum of money when the desired products by the consumer are delivered to his house by store manager”, or “the grocery store manager asks for certain some of money for delivering the desired products to the house of the consumer”. In first case a promise of money is made in exchange for performing a task or act, whereas in the other case it is performing a task in exchange for the money.

One can witness and experience such exchanges everywhere and every day in our current system. Paying rent, paying bills and almost all transactions are part of a contract. Contracts in the current system can be recognized as the foundation stone of our civilization as they help in preventing any conflicts, mitigate risks and works as a record for obligation from all parties. It is through these commitments or agreements human race has been able to work collectively and achieve the heights that they have achieved.

Contracts can either be verbal or they can be written, but they can only be meaningful when there are methods through which it can be enforced, thus preventing the parties in the contract to break their promise. The enforcement of the contract is the job of our legal system, so a contract takes place between three parties: the promisor, the promisee and the legal system or state.

No matter how simple and perfect it sounds, this system have its fair share of problems: transparency, Money, time consumed and conflict of interest are some of the areas where there is a lot of scope for improvement.

What and Why of smart contracts

Smart contracts use computer code and programing; in case of smart contracts there is no requirement of human involvement, as they will execute automatically when the requirements of the contracts are fulfilled. Smart contract completely eliminates the need of a third party such as lawyer to scrutinize and verify the information of the contract, thus allowing the stakeholders to directly come to agreement of contract and saving a lot of time and money.

Smart contracts help in eliminating any conflict of interest between the promisor and the promisee. The best way to understand this is by considering the example of insurance. Here the interests of a for-profit insurance company are different from the interest of the insured person. The insurance company is fully motivated to not follow through the contract, whereas the insured has to trust the company to fulfill their promise.

Smart contracts will automate the process once the predefined obligations are fulfilled, they are transparent and public. Since smart contracts are built on blockchain they completely eliminate any editing of the contract after their deployment.

In countries where the legal system is highly developed people can take contract enforcement aspect for granted. Whereas in other countries the reality can be very different as the legal systems are too burdened, less robust and understaffed. In such countries the time taken to obtain legal resources for the settlement of a contract can be very time consuming. Smart contract on the other hand can automate a lot of work of the legal system thus saving a lot time, reducing burden and ensuring that justice is served to everyone while still adhering to the laws of the land.

Smart contracts: Use cases

The most common example that we see every day of a smart contract is a vending machine. Vending machine has completely eradicated the middleman or shopkeeper and the process of buying and selling is made automated. Some other cases related to smart contracts that can make your life much easier are –

Financial sector – Trust is a critical factor in financial sector which comprises of various intermediaries who may not share a common interest as the consumers. With increase in the popularity of DeFi, people have started to realize the value in financial services that earlier were trustless.

Liability – Leakage of information leading to identity theft is a huge problem that various organizations have to face. Big companies like Meta, Google, and etc. stores huge amount of data on their customers and the customers have no other option then trusting these organizations to keep their information safe. Smart contract will ensure that people are in control of their personal information, thus reducing liability of companies to safeguard information.

Supply chain management – Smart contracts implementation in supply chain management will help in simplifying the process of supply chain as there are many stakeholders involved and at times it can become a hectic process. Usage of IoT along with smart contracts will provide greater security and visibility for supply chains.

Medical aid – Smart contracts will ensure that medical information about an individual can be shared with various stakeholders in health sector without compromising the integrity and security of data. This will help in providing better medical assistance to an individual in most cost effective way.

Smart contracts are one of the few technologies that have the ability to redefine the process through which business is conducted. It has the ability to change the entire landscape of business in our society. It is now completely on us to ensure that we are prepared to the changes that are coming in the future.

Disclaimer: The article should not be considered as any financial advice. It is advisable to conduct thorough research before investing.

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