Blockchain Smart Contracts: Implementation and Benefits

We are constantly making deals. It doesn’t matter what it is about: buying a product, exchanging goods, providing services... in any case, all these activities involve drawing up and signing a contract. Moreover, the traditional model of business relations includes a third party in the process: a banking institution, a law enforcement company, a government agency, the choices are many! Its task is to confirm and ensure the fulfillment of the terms of the contract.

But these kinds of intermediaries are an additional headache. They imply a waste of time and money without any clear guarantee of a successful closing of the deal. On the other hand, self-executing smart contracts are a whole different thing! They’re incorruptible, highly intelligent mathematical algorithms and cannot be deceived.

But what’s a smart contract? Why is it needed and what are its advantages? Is it possible to simplify and automate business processes with its help? And finally, how to develop smart contracts?

So many questions! To get answers to them, you have to take your time and read our blog piece. And then feel free to contact us.

What’s a Smart Contract?

As Dune Analytics revealed, the number of new smart contracts on the Ethereum network alone is constantly growing. There are various reasons to explain such an unstoppable rise in popularity, and one of them is that the development of digital technologies reduces the cost of placing smart contracts and makes the whole thing much easier.

A self-executing smart contract is a digital analog of traditional agreements. It's a special algorithm performing certain actions when specified conditions are met (for example, sending money to the seller when the goods are delivered to the buyer). Smart contracts are a great way to eliminate the intermediary when making deals, whether it's selling goods or providing services.

Smart contracts work on the basis of the blockchain. It is the blockchain network that stores the information embedded in them. Enterprise blockchain development is becoming increasingly important for businesses aiming to implement smart contracts and enhance operational efficiency.

An example of self-executing contract use

• Imagine a company that helps people sell cars. It has a special digital accounting system, which stores data about vehicles. To simplify the process of closing deals, the company uses smart contacts.

• Each smart contract contains data about the car, information about its current owner, the date of the last sale, the transaction price, and much more.

• Let's say there is a certain car owned by Mr. Smith. Wanting to sell it, he enters the data on his vehicle and specifies the price for which he is ready to party with it. Now anyone who transfers money using the smart contract is able to buy Mr. Smith's car.

• A buyer named Donovan came to Mr. Smith, inspected the car, and decided to buy it. He transfers money through a smart contract, which starts the process of its self-execution. As a result, the money goes into Mr. Smith's account, and the car automatically becomes the property of Mr. Donovan.

What makes smart contracts reliable?

Since smart contracts are based on the blockchain, they inherit their most important features, such as:

• the immutability of smart contracts, which means no one can falsify them later;

• better protection against fraud, since any operation should be confirmed by all participants in the network;

• high informativity, as one is able to see the required information about the subject of the transaction.

In summary, let's say that a smart contract cannot be faked, changed, or deleted, which makes it so reliable. We'll talk more about the benefits of smart contracts on blockchain networks a bit late, though, just keep reading.

Smart contract concept: key objects

• Deal participants. Each party to the transaction has his/her own unique digital signature;

• The subject of the transaction (contract), whether it is a product or service;

• Terms of the transaction (say, transferring money to the seller's account, provided the goods correspond to the declared quality). And these terms must have a clear mathematical description;

• The program code of the smart contract itself.

Basic types of self-executing contracts

• 100% automated smart contracts. It is fully digitalized and has all the perks that innovative technologies provide us with.

• Hybrid smart contracts. It’s a traditional paper-based contract with some digitalized clauses (why not conduct money transactions online?);

• 2 in 1. Smart contract with its paper copy.

History of smart contract technologies 

The smart contract concept is quite old, the idea originated at the end of the 20th century (more precisely, in 1994). However, it was practically implemented closer to the 21st century (in 2008), with the advent of blockchain technology.

In those days, blockchain only worked with bitcoins, so smart contracts remained just an abstract theory. The explanation is simple: the creators of bitcoin wanted to ensure greater security of their network and introduced many restrictions on working with it. And these restrictions affected smart contract development either.

But five years later, Vitaly Buterin created the Ethereum cryptocurrency and expanded the possibilities for programming smart contracts in the environment of the new blockchain network. Moreover, Ethereum smart contracts are still very popular and in demand. Although today they're far from the only solution (we'll discuss others later in our article).

How a Smart Contract Works

The smart contract code contains an algorithm of actions that should be performed when certain agreed-upon events are triggered.

A smart contract records all the information to the blockchain, and the code is placed in a special block (the so-called software container). There is also the concept of messages, which are the inputs and outputs of a smart contract (the predefined conditions the smart contract is waiting for, and the actions it performs when they're met). It sounds complicated and confusing, but you definitely get the gist. And anyway, you don't need to understand the details to create a smart contract.

But there is something you do need to understand! Therefore, take a look at the approximate process of creating and executing a smart contract:

• discussion of the deal terms between the participants;

• fixing these terms and concluding/creating a smart contract;

• connecting a smart contract to internal and external systems (say, financial payment solutions to make transactions in a more convenient and safer way);

• waiting for the events described in the contract to occur;

• assessment of the status by the smart contract (do the parties fulfill the terms of the transaction?);

• self-execution of the smart contract if everything meets the established requirements. 

So when one implements smart contracts, he or she completely eliminates the intermediary from the transaction process. Thus, we get a system that requires neither registration & regulatory authorities nor certificates/paperwork. You don't need to go somewhere to make a deal and sign a contract. Doesn’t it sound cool?

Main Benefits of Smart Contracts 

• Better security. Any money relation is a rather delicate matter and requires a special approach. And smart contracts are the best solution in this respect. Their trick is the improved protection of transactions and the most secure storage of digital assets. The explanation is the environment in which they work (namely, the blockchain network).

  • Less risk of fraud, improved storage of confidential data, and the immutability of information is what you get if you create a smart contract and implement it into your business processes. From the article at the link, you’ll learn a lot of useful information about the development of blockchain technology (blockchain for business) and its main advantages.

• No delays. Any third party involved in the transaction means extra time to communicate with them. The digital algorithm in the role of such a party simplifies the entire thing and therefore speeds the process up. Moreover, smart contracts work even at night, 24/7.

• No human factor. We, humans, often make mistakes, which is only natural. However, by implementing smart contract technology, we avoid this risk. We exclude the likelihood of the human factor.

• Lower costs. Smart contract benefits include the ability to do without commissions and thereby reduce the cost of the transaction. After all, if there is no third party such as a financial institution, there is also no need to pay them for intermediary services.

• Accelerated transactions. The digital format means the automation of transactions, which leads to a higher speed of their processing. No need to deal with human participation.

We’re done with the benefits of smart contracts, but what about the areas of their use? Let's see what can be said in this regard.

Who Implements Smart Contracts: Popular Usage Areas

Storage of important information

The primary purpose of a smart contract is to securely store information and update it as needed. And it doesn't really matter what market we're dealing with (logistics, real estate, whatever!): data storage is a must-have anyway.

And only if the data is secure, we can move on to the issue of guaranteeing compliance with the terms of the transaction (in which the smart contract helps us too).

Logistics and supply chain management

Logistics and the supply chain are inextricably linked. Unfortunately, these processes are still far from perfect. Managing them is troublesome and difficult. Happily, by developing smart contracts, you get rid of at least some of the problems and make the supply chain more reliable.

With blockchain technology, all records of the supply process, from warehouse operation to the delivery of goods, can be maintained digitally and controlled by smart contracts. Therefore, there is less risk of one of the parties violating the terms of the deal.

We talk a lot about how blockchain & smart contract development can improve logistics in another article (just follow the link).

Real estate

Realtors and other players in the real estate market are constantly working with various kinds of contracts. So their digitalization is one of the most promising blockchain usage areas. 

Smart contacts greatly simplify transactions related to the sale and lease of property. Firstly, there is no need for personal meetings to conclude any agreements. Secondly, less risk of fraud. Thirdly, all processes are automated and therefore accelerated.

Mortgage lending

Mortgage lending also cannot do without drawing up and signing contracts. And if they're smart, so much the better! 

The thing is, digitalization makes the process of obtaining mortgages more transparent, understandable, and secure. Definitely, the smart contract concept works in this case.

Healthcare

When it comes to medicine, smart contracts are a wonderful way to manage patient records as they allow securely storing huge amounts of data. There are also more opportunities to control the treatment process, and do it digitally. Besides, if necessary, doctors and patients can conclude self-executing contracts to document some moments of treatment (which could come in handy either).

Any transactions

Any business dealing with online transactions will become more efficient after their digitalization. No intermediaries and commissions, lower risk of fraud, faster processes… we’ve already described key the smart contract benefits, so you know what the point is.

Elections, voting, betting

A smart contract is what you need to monitor the conduct of the elections, voting, or auction and avoid their falsification. Digital algorithms are very reliable: they cannot be bribed, they count votes honestly and produce truthful results. In addition, the system automatically fulfills the terms of the deal, whatever they may be.

Smart Contracts on Blockchain Networks: Main Types

Not all blockchain networks are suitable for creating self-executing contacts. We’d like to describe a few of the most popular options:

• Ethereum. Without a doubt, Ethereum is the first thing to come to mind when one thinks about smart contracts. Created more than 5 years ago, the system continues to evolve and offers more and more cool features. And it especially focuses on developing smart contracts.

  • Thousands of smart contracts based on Ethereum have already been created, which cannot but impress. That's why, although there are better blockchain platforms, Ethereum is still considered the benchmark in this regard.

• Hyperledger Fabric is another good option if you want to make smart contracts. The project's history began at the same time as Ethereum (in 2015). Its advantage is less vulnerability (even compared to Ethereum smart contracts). 

  • Solutions from Hyperledger Fabric are commonly used by large businesses.

• NEO is called "Chinese Ethereum". Being its analog, NEO works much faster than its famous rival... which is by no means its only advantage over Ethereum. In some aspects, NEO is more perfect than other popular blockchain networks (at least, when it comes to smart contracts). 

• Stellar. Dealing with Stellar is very easy, and the reason is its user-friendly, intuitive interface. Despite this, solutions from Stellar are less popular than Ethereum smart contracts (although Stellar was created a year earlier than Ethereum).

• Free TON. Finally, it is worth mentioning Free TON, a newer blockchain system. It is more thoughtful and effective compared to all the solutions listed. Its advantages are high speed, security, multilingualism, scalability, and others.

Need some inspiration? Follow the link and take a look at the top blockchain startups!

If you’re determined to make smart contracts part of your business processes, you should know what you have to face and what challenges you need to overcome.

Development Challenges 

• Questionable privacy. Smart contracts are far from ensuring the proper confidentiality of data shared by participants in the blockchain system (because blockchain is an inherently transparent network). On the other hand, developers have already been working on solving this very problem; the proof is the Hyperledger platform, which guarantees 100% confidentiality to the parties.

• Security vulnerability. Yes, smart contracts are securely protected, but the danger of cyberattacks still remains. Don’t fret, though! After all, nothing ventured, nothing gained. You just have to figure out how to develop smart contracts without any security vulnerabilities.

• Force Majeure. Any digital algorithm is based on clear mathematical logic. The system is unable to understand what force majeure is. The terms of the deal must be fulfilled regardless of what happened.

• Incorrect coding. Smart contract development requires certain skills, and if you entrust the work to inexperienced specialists, the result can be disappointing. Errors in the code lead to smart contract hacking, blocking of funds, and other similar problems.

• Fraudulent contracts. If a smart contract was created incorrectly (see the list item above), fraudsters have the opportunity to manipulate the terms of the transaction in their favor.

• User ignorance. So far, few people know how smart contracts work and why they are needed. It causes a lot of questions and misunderstandings and leads to distrust in new technologies.

• Contact immutability. Sometimes it’s necessary to make changes to ready-made contracts (let’s say, new circumstances have arisen or something else). Alas, in the case of blockchain technology, you’ll have to create a smart contract from scratch, a new one.

• No legal basis. Another problem is that smart contracts aren't legally binding yet. They have to perform certain business logic using software means, that's all. However, the situation may change in the future (and it should change).

As you can see, the process of creating a smart contract isn’t as simple as it might seem. However, the game is worth the candle, as companies that have successfully applied these technologies prove. 

Let’s take a closer look at some of the most impressive cases.

Real-life Smart Contract Examples

• The illustrious R3 consortium, which includes more than 40 major financial companies, is actively working to introduce blockchain into the fintech market. And smart contract development is part of its global project;

• Bank of America has begun using smart contracts instead of letters of credit (a written guarantee from the payer's bank to the recipient's bank). It's still a little, but it's a start anyway!

• German insurance giant Allianz doesn't neglect digital means either. Company resorts to self-executing contracts to automate insurance payouts in the event of natural disasters;

• Barclays, a large financial conglomerate in the UK with a strong presence in Europe, the US, and Asia, also implements smart contracts to automate payments. Besides, smart contracts allow the company to simplify the process of changing ownership rights when carrying out the deal;

• Real estate platform Propy decided to take advantage of blockchain technology to remove unnecessary steps from the process of buying and selling property objects. And smart contracts are part of the process too, obviously;

• Everledger verifies the provenance of diamonds and creates electronic gemstone passports stored on the blockchain. And of course, it uses a special type of smart contract to verify this data, ensure compliance with standards, and detect illegal activities and fraud;

  • Everledger has already successfully verified the provenance of over 1 million diamonds. Moreover, since 2016, the company has begun to apply its business model to other markets (such as fine wines).

FAQ

Why does it make sense to use smart contract technology in business logic?

The creation of a smart contract is a digital analog of paper contracts. It is based on blockchain protocols that regulate the terms of contracts between parties. It utilizes self-executing blockchain-based code. Smart contracts are created in an appropriate way to meet all conditions. The exchange of cryptocurrencies won’t take place and the contract will be terminated. 

What are the benefits of smart contracts on the blockchain?

Blockchain is a distributed ledger with data encryption and varies from conventional contracts by the highest level of protection against fraud, which increases the trust of the users. When you clearly and unambiguously specify the conditions before the launch of the smart contract and subsequent automatic and mandatory implementation, you can avoid unwanted litigation. A smart contract also replaces the arbitration fee. It reduces the likelihood of disputes, but this can be achieved if the terms of the smart contract are legally reviewed and comply with the will of all parties, and applicable laws.

What is the best platform for creating smart contracts?

The most popular and one of the best platforms for developing smart contracts is the ETH blockchain. All network participants have a copy of the code. Smart contracts are completely transparent to all users on the blockchain. The contract terms can’t be changed without the entire network knowing about it. You shouldn’t worry about whether the terms of the agreement or identity will get into the network. Smart contracts are one of the best tools for security reasons.We’ve described the process of creating a smart contract and revealed its pros and cons. So now you know what is good about self-executing contracts and what risks you’ll have to face in order to use them in practice.

Summary

We’ve described the process of creating a smart contract and revealed its pros and cons. So now you know what is good about self-executing contracts and what risks you’ll have to face in order to use them in practice.

Be that as it may, our article should have convinced you to include blockchain technologies in your business processes. And the sooner this happens, the better. That’s the only way to prosper in a highly competitive market.

Our team is ready to help you with any software project. Contact us and we'll be happy to start our collaboration.