Smart Contracts are computer programs with automatic execution features. They are based on contracts or agreements which will lead to a specific action once the terms specified in the agreement have been reached. This action is done automatically, hence the name, “smart”.
A simple illustration would be “Pay A a certain amount of money immediately A completes this task according to the guidelines given”.
If A completes the task as agreed, he would be paid automatically without a middleman.
The concept of smart contracts has been around since the 1990s, but. became popular with the advent of blockchain and the cryptocurrency network, Ethereum which built the first cryptocurrency smart contract protocol.
Since then, many applications and technological solutions have been built on the Ethereum smart contract protocol. Applications such as web browsers, cloud storage, games, social networks, decentralised apps(Dapps) have all emanated due to smart contracts and blockchain technology.
Why are Smart Contracts Useful?
Smart contracts have provided a revolution in the way things are done in the digital economy.
Some benefits of smart contracts are:
Elimination of middlemen or intermediaries: In the past, when big transactions were to be made, middlemen including banks and lawyers were used as neutral grounds to facilitate these transactions. Smart Contracts being decentralised, eliminate this, meaning that no party can exercise influence on the intermediary.
Cost-effective: The elimination of intermediaries reduces the cost of maintaining them, as there would be no need to pay a lawyer or broker.
Safety of Records: The records on a smart contract are permanent, cannot be tampered with and can be retrieved at any time as long the party has access to the code.
Fast: Smart Contracts are fast, since most of the actions are automated. There is no need to access that the terms of an agreement have been met before executing an action such as a payout, for example.
Application of Smart Contracts
Insurance: Smart contracts help in record keeping and fast verification of insurance claims. On the blockchain, conditions are set before payment of insurance claims, and when these conditions are met, payments are made automatically.
A smart dental company, Beam Dentals uses smart contracts to encourage dental hygiene and help members save on insurance premiums by providing smart toothbrushes connected to an app, which detects the number of times they use the toothbrush and automatically reduces the amount they pay monthly on premiums.
There is also the concept of DeFi Insurance, where individuals pay premiums to a DeFi insurance provider to protect them against losses in the decentralised finance industry
Gaming Applications: Play to earn games have garnered a lot of interest from gamers, thanks to smart contracts. The smart contracts control the amount of rewards a player earns from winning a specific number of games.
Smart contracts also control in-game purchases, royalties for game developers and manage gaming pools.
Decentralised Finance (DeFi): DeFi involves the provision of. financial services such as loans, management of assets, exchanges etc without banks or middlemen. DeFi protocols are based on smart contracts and blockchain technology.
Non-fungible Tokens (NFTs): The minting and transfer of ownership of NFTs are managed by smart contracts, which provide a safe and easy way to acquire NFTs. This also prevents duplicity of NFTs as the blockchain used prevents duplicity of data.
Airlines/Flights: Smart contracts are used in aviation industries to prevent overbooking of flights as blockchain transactions are permanent and cannot be duplicated. Some airlines also have smart contracts that are able to provide refunds of flight tickets if flights are delayed beyond a specific time.
Shipping: Smart contracts and blockchain technology are currently employed in the shipping of goods. This has eliminated the need for many paper transactions and reduced logistics fees. Companies can track their shipments and make automated payments securely on the blockchain.
