Table of Contents
Smart contracts are computer programs or codes that trigger an automatic execution when a party(s) meets the agreed terms or conditions. When all parties involved meet the terms of the agreement, the smart contract automatically executes and fulfills its terms. The contract terms are explicitly written into the lines of code that form the smart contract, and the lines of code are stored on the blockchain. As a blockchain component, smart contracts have made financial transactions between users trustless and permissionless, without an intermediary.
They are based on programming languages’ “IF-THEN” logic, where funds can be sent, stored, and received when certain code conditions are met. Additionally, they can activate other programs, interact with servers, and execute other smart contract codes. Smart contracts enable a self-operating system by removing the need for human decision-making. Blockchain operates on this principle, providing a trustless and permissionless network. Smart contracts have numerous applications, including supply chains, financial services, healthcare, governance voting systems, games, e-commerce, and art (NFT).
Benefits of Smart Contracts vs. Traditional Contracts
Smart contracts offer numerous advantages that are reshaping the way we conduct transactions and agreements. Here are some of the primary benefits:
Smart contracts automate business processes, saving time over traditional contracts that rely on physical signatures. With digital signatures, smart contracts can be executed within minutes, regardless of location.
Traditional contracts involve manual processes that increase the probability of human error, which can lead to security breaches. For example, smart contracts use cryptography to encrypt the agreement, documents, funds, and information on the blockchain, providing a secure way to transact.
Unlike traditional contracts, smart contracts don’t require third parties to confirm agreements. Third parties cannot manipulate the agreement outcome through brokers or agencies, making the process more autonomous.
4. Cost savings
They save time and money by eliminating intermediaries and their fees. Unlike traditional contracts, which can be expensive due to fees from third parties and different entities involved, smart contracts reduce costs by removing intermediaries and time delays.
By removing the human factor from the decision-making and data-processing processes, the system (codes) increases in accuracy. The use of smart contracts eliminates errors associated with manual form filling.
6. Trust and Transparency
They are mostly open source; all interested parties can access the terms and agreement. Additionally, smart contracts cannot be edited once launched, and their terms are always public. This creates high trust and transparency, which differs from traditional contracts.
7. Backup or Archiving
Smart contracts are decentralized, keeping records immutable and files undestroyable. The blockchain can retrieve original copies of documents and record all financial transactions related to the self-executing agreement automatically. This is very difficult with traditional contracts, which rely on paper-based documentation to keep records offline.
Smart contracts facilitate financial settlements or remittances within minutes since they pre-define and embed the conditions in the code. These conditions must be met for the remittance to be processed automatically. In contrast, traditional contracts require manual remittance and approvals from concerned bodies.
Use Cases for Smart Contracts
Smart contracts are not limited to financial transactions. Their versatility has led to their adoption in various sectors, including:
1. Digital Identity
Smart contract-enabled wallets allow for the creation of digital identities with verifiable credentials attached to them. These credentials can be automatically verified through a smart contract program that connects the issuer and the holder. Credit scores, medical health data, insurance data, and other credentials can be easily verified.
2. Property Ownership
Decentralized identifiers (DIDs) and self-sovereign identity (SSI) can be used to create digital IDs for properties, along with their history, that can be updated whenever a new owner exists. These details are immutable and stored on the decentralized network. This data can be useful for mortgage application processes during data gathering and verification.
The typical mortgage application process relies heavily on paper in today’s technologically advanced business world. Record-keeping and data verification can be an unexciting experience with paper-based processes and a high probability of human errors. Not just that, this process is labor-intensive and time-consuming, both for the mortgage companies and the customers. This route of operation is expensive and stressful. Introducing smart contract technologies will cut the processes short, eliminate third parties, reduce user fees, and make information verification more manageable and trustworthy while making record-keeping seamless through decentralized databases.
4. Insurance Management
Automated payment or settlement processes are rare with insurance companies because many disputes occur in the insurance world. However, smart contracts can automate policies and services implementation such that all claims can be automatically verified and settlements processed instantly. While this cannot be applied in all insurance packages, it can be used in “trip delay insurance” plans where trips are delayed or canceled.
5. Voting in Elections
The democratic process of many countries is improving. However, there are still exhaustive reports of vote manipulations, security of election materials, and low voter turnout in some situations. Smart contracts can eliminate these threats to democracy. Code is the new law, eliminating human errors and promoting transparency. It supports openness and transparency because anyone can see smart contract codes and conditions for vote calculation. Additionally, individuals can view their voter records while ensuring the privacy of their identities.
6. Music Industry
iTunes and apple music changed the music industry through the digital distribution of songs and royalty payments. Smart contracts can make these processes more effortless. The percentage that goes to the record label and artist can be set in the smart contract codes, making payments automatic and instant. Furthermore, non-fungible tokens can make artists’ intellectual properties non-fungible, enabling them to receive royalty payments from various music platforms with ease.
In conclusion, smart contracts are revolutionizing various sectors of our economy, including supply chain management, crowdfunding, e-commerce, and record keeping. They also enable secure data sharing among entities and are the backbone of decentralized autonomous organizations (DAOs), including some decentralized finance (De-Fi) projects. This blockchain-based technology promises more technological advancements in the future and is changing the way we conduct business. As we continue to leverage smart contracts, the future is already here, and it is exciting to see how this technology will continue to evolve and impact our world.
Blockchain is the future, and it is impressive to see Identity.com contributing to this desired future through the Solana ecosystem and other Web3 projects. Also, as a member of the World Wide Web Consortium (W3C), the standards body for the World Wide Web.
Identity.com, as a future-oriented company, is an open-source ecosystem providing access to on-chain and secure identity verification for businesses, giving their customers a hassle-free experience. Our solutions improve the user experience and reduce onboarding friction through reusable and interoperable Gateway Passes. Please refer to our docs about how to help you with identity verification and general KYC processes.