Smart contracts were first introduced in the Ethereum project in 2013. The contracts which can be done and maintained over blockchain which impose the same limitations and obligations on agreeing with parties as it is done traditionally are called smart contracts.
Let’s take an example, assume you want to apply for driving licence in a blockchain mechanised process then all you have to do is just mention your social security number in US or Aadhar in India and the form will be filled automatically and pay using cryptocurrency. Blockchain will not accept your form if you do not fulfil the criteria mandatory to fill that form. The blockchain will select a driving test centre depending on mutually agreed timings and drop your details and payment to corresponding authorities and you will receive the address of test centre, application id and password. On passing a driving test and road test blockchain will automatically drop your driving licence into your email account associated with your social security number or Aadhar. All the cumbersome paperwork and time-consuming process is minimized and automated using blockchain which eventually reduces the overall cost.
Why Smart contracts are better than the current system?
Blockchain uses a shared ledger which is replicated on every system which is connected to its network so there’s no way some information is lost.
Cryptography, hashing and consensus algorithms make it nearly impossible for hackers to infiltrate the network.
Every transaction on ledger needs to be validated by the majority of validator nodes on the network so it is really difficult to collude with them. Even if they adjoin as a cartel to validate a fake transaction they are the ones who will take the biggest hit, so no one will think to break the trust of network participants.
Smart contract omits the need for intermediaries and in person, meetings to implement a contract. Smart contract works as a whole system which can act as a broker, an authorizing authority, a delivery guy and a settlement organization.
Smart contracts save money since they knock out the requirement of an intermediary. You might, for instance, have to pay a notary for witnessing your transaction.
Galumph processes to make a contract with heaps of forms cause anomalies in the filing. Smart contracts are strictly intact and electronic which improves accuracy.
Time saved in filling forms, physical visits, validation and authenticating transactions speeds up the process thousands of times.
Where Smart contracts can be used?
Officials during every election vouch that it is impossible to rig current voting machines but nonetheless there’s always headlines concerned about speculations of tampering with Voting machines. The globalization of economies and fumbling voting process has resulted in low voting participants. Smart contracts of Blockchain based voting system can solve both problems as we will be able to vote online and voter’s identity can be validated by blockchain which is almost impossible to hack.
Smart contracts in businesses can act as business process management tools. Usually, the lag in decisions in business creates deadlocks for other processes, blockchain can make sure decisions are taken as soon as possible and there’s no lag in conducting the action on previous orders. Information passed on in the next step will only be available to concerned users and the transactions will be recorded in real time.
Smart Contracts of Blockchain coupled with IOT is playing a vital role in transforming the supply chain applications to record real-time transactions to eliminate the possibility of fraudulent activities. Data from suppliers, logistics, warehouses, retail stores are recorded using RFID tags, trackers and barcodes.
Walmart and Maersk are already using this technology to securely record transactions in real time which reduces time lag in delivery and makes the system efficient.
The developments in AI, IOT, Smart contracts, High-speed computers and data communication all at the same time has preponed the era of autonomous transportation. AI and IOT based self-driving cars and applications like Uber when combined together will enable us to summon transportation whenever we need. This mode of transportations will be cheap and safe as the automated process will eliminate the possibility of accidents as the network will know about the coming traffic.
A company called Zoox has already developed an AI-based self-driving car that can be summoned anytime. They are in the pursuit of the testing phase and making this solution cheaper to make it viable for global markets.
You can get more money through smart contracts. Ordinarily, if you wanted to rent your apartment to someone, you’d need to pay a middleman such as Craigslist or a newspaper to advertise and then again you’d need to pay someone to confirm that the person paid rent and followed through. The ledger cuts your costs. All you do is pay via bitcoin and encode your contract on the ledger. Everyone sees, and you accomplish automatic fulfilment. Brokers, real estate agents, hard money lenders, and anyone associated with the property game can profit.
Personal health records could be encoded and stored on the blockchain with a private key which would grant access only to specific individuals. The same strategy could be used to ensure that research is conducted via HIPAA laws (in a secure and confidential way). Receipts of surgeries could be stored on a blockchain and automatically sent to insurance providers as proof-of-delivery. The ledger, too, could be used for general healthcare management, such as supervising drugs, regulation compliance, testing results, and managing healthcare supplies.
Why blockchain is not being widely used even after a decade from its launch date?
Smart contracts are far from perfection it is still in development. The real problem for developing smart contacts is that there are so many rules and regulations for a particular solution and blockchain should act according to ever-changing norms.
Let’s take another example where we want to replace traditional options contract with a smart contract. An options contract is usually an exchange-traded contract which gives the buyer of contract a choice to buy an underlying asset with call options contract or to sell an underlying asset with put contract at a particular strike price on or before the expiry date of contract whereas the writers of these contracts have a legal obligation to honour the contract. There are two types of options contacts American options contract and European options contract. In American options contract the buyer of options contract can profit from his/her advantageous position with respect to current market price by exercising the choice any time before the expiration date but in a European options contract, the choice cannot be exercised before the expiry of the contract.
NYSE (New York stock exchange) uses American options contract and NSE (National stock exchange) of India uses American Options contract for individual stocks and European options contract for indices. NYSE considers third Friday of the month as expiration date whereas NSE considers last Thursday of the expiry month as expiration date if the expiry day is a trading holiday then expiration date of the contract is preponed to the previous trading day. The options contract can be traded and closed until the previous day of the expiration date. Contracts, where option buyers are in an advantageous position called ITM (In the money) on the date of expiry, will be exercised by exchange and others will expire as worthless.
The real problem is on addressing these regulations and anomalies in smart contracts will slow down the consensus algorithms which in consequence affects the performance of blockchain catastrophically. Unless and until these problems are addressed effectively smart contracts are ruled out from the list of viable solutions.