SMART CONTRACTS: HOW THEY WORK AND WHY THEY ARE NEEDED. PART 2
Today we will continue to analyze the technology of smart contracts, which gained its popularity with the emergence of blockchain and cryptocurrencies. In the previous article, the main differences between classical and smart contracts were considered, the history of the appearance of smart contracts and the fundamental foundations of their functioning were analyzed. Today we will consider the main areas of application of smart contracts, the prospects for using this technology, as well as discuss its advantages and disadvantages.
Areas of application of smart contracts
Smart contracts allow you to make any form of transaction between contract participants. Smart contracts allow you to perform operations for the exchange of any forms and types of property, including fiat and cryptocurrency assets, allow you to provide credit services, insurance, voting procedures, elections, organization of delivery management, and storage of goods. With the help of smart contracts, you can control any financial and property relations.
According to experts, among other promising areas where the introduction of smart contracts is possible are the following areas:
- health care;
- media industries;
- maintaining state and other types of archives.
In addition, the use of smart contracts is also possible in other social, financial, and property spheres of relations between people. According to the report of the international company Deloitte, which provides consulting and audit services, the use of smart contracts has great prospects in the field of clearing and international logistics for the formation of product supply chains.
Smart contracts can even be used to distribute property, rights, and obligations during inheritance while distributing the inheritance line among the heirs.
For example, the testator can register in the terms of the smart contract the accounts of the heirs in the event of his death. After the contract is put into effect, the system will periodically monitor information about the list of the deceased from the state register.
As soon as the system detects the name of the testator in the list, the contract automatically fulfills the conditions of inheritance, without excessive bureaucracy and involving the services of notaries, sends money to the accounts of the heirs, or transfers the property rights to the objects of the testator’s property.
All this happens automatically when the programmed contract execution condition occurs. The obligation to fulfill the terms of a smart contract is guaranteed by the use of technical protocols that guarantee the immutability of its terms.
Using the blockchain to deploy a smart contract allows you to make its terms and operations transparent and open to all participants in the inheritance process, which will avoid any disputes between counterparties.
A logical question may arise — how do smart contracts get information from the outside world? To do this, smart contracts use a special “pad” to the outside world, which is called an oracle. Oracles are responsible for providing reliable information from the outside. We will talk in more detail about the oracle technology in smart contracts in the following publications.
The capabilities of smart contracts, along with the advantages of using blockchain as the basis for smart contracts, guarantee security, immutability, as well as decentralized storage of information in the registry.
The combination of such characteristics allows you to safely implement and build transparent mechanisms for interaction and information exchange between smart devices in the Internet Of Things (IoT) system, for example, between smart refrigerators, Wi-Fi sockets, smart thermostats, light sensors, smart cards, and smartphones.
For example, when connecting a smartphone to charging via a smart outlet, if there is no charge due to non-payment of electricity bills, automatic payment of an electricity bill can be prescribed in the terms of a smart contract. After paying, the smart socket starts charging your smartphone or smart car, which is located in your garage.
Advantages of smart contracts
As we mentioned earlier, the potential of smart contracts has a wide range of applications in various areas of interaction between people.
Smart contracts are most widely used in the field of cryptocurrencies. However, smart contracts are already being used in many other areas, including social, financial, and property. Basically, the practice of using smart contracts is reduced to automating certain aspects of classical contracts.
The main advantages that led to the mass development and application of smart contracts include:
- Safety. The fundamental basis of smart contracts is the blockchain, which guarantees the openness, transparency, and immutability of the conditions laid down in the smart contract. In addition, cryptographic methods of information protection are used for the security of smart contracts, which cannot be hacked by any modern technical means.
- Autonomy. The conditions programmed in the smart contract code are executed automatically when the specified conditions occur without the participation of intermediaries.
- The objectivity of the recorded conditions. Smart contracts are created using programming languages and technical protocols, as a result, the possibilities of discrepancies in the terms of the contract associated with subjective human factors of information perception are minimized.
- Cost reduction. Since the use of smart contracts does not involve the participation of third parties in the form of banks, brokers, microfinance organizations, and notaries, making transactions using smart contracts can significantly reduce the costs of transactions.
- Speed. Smart contracts use software code to automate the fulfillment of specified conditions. In the case of using classic contracts, these conditions are executed manually, which requires more time.
Disadvantages of smart contracts
Smart contract technology is not without drawbacks, which, however, do not hinder the mass development and use of smart contracts, most of which can be eliminated by developing and updating software protocols and smart contract technologies.
Among the most significant disadvantages of smart contracts are:
- The use of smart contracts in the field of “Internet of Things”. IoT systems are not sufficiently reliable and cannot meet the security level of smart contracts. IoT devices are easy to hack and get unauthorized access to them.
- The need for careful thinking and programming of the terms of a smart contract. When creating smart contracts, it is necessary to take into account the smallest details of the transaction. In case of an erroneous recording of the algorithm execution conditions — the program will impartially perform the programmed functions. Therefore, the more complex the transaction process, the more difficult it will be to create a smart contract for it and take into account all the smallest conditions.
- Legal regulation of smart contracts. For the functioning of smart contracts, it is necessary to create a special regulatory environment that determines the status and legal force of smart contracts.
As the infrastructure and legislative framework of the countries develop, smart contracts will lose their main drawbacks and will allow creating a new economic decentralized system without intermediaries, which will significantly reduce costs and speed up business processes between counterparties.