Imagine a world in which a business deal didn’t need a team of lawyers. Imagine you could do it all instantly, securely, with complete trust — all over the internet. This kind of streamlining seems like science fiction, especially in India. Bureaucracy and red tape will become relics with the advent of the web3 smart contract.
What’s a Smart Contract?
A smart contract is a program that locks and stores the terms of an agreement on a public blockchain (e.g. Ethereum). Unlike traditional contracts, though, a smart contract is self-executing. This means that when its terms are met, the program can automatically execute the next action. For example, instantly transferring ownership deeds when payment is received. Let’s see the difference in an imaginary transaction between a business and its supplier:
The Smart Part
- Faster Transactions: automatic execution and less personnel reduce communication, approval, and execution time, increasing efficiency
- Eliminate Human Error: as the program automatically executes itself as soon as terms are met, there is no room to delay or renege on the terms
- Streamlining: using code and logic statements instead of legal language makes the contract transparent and objective, reducing the need for lawyers.
- Security: since the contract is stored on a public blockchain and locked, it cannot be tampered with manually. It also cannot be hacked as there is no one point of attack on a blockchain
Transparency: as the contract is on a public ledger, each audit, approval, and progress update is publicly available and timestamped increasing accountability and traceability
Businesses and governments are just beginning to explore the potential of smart contracts. This has already yielded big results in several sectors:
Decentralised Finance uses blockchain technology for buying, selling, and trading assets. This industry has a CAGR of 43.8% and is expected to be worth over $500 billion in 2028 due to the promises of instant, automated, and secure transactions.
DeFi uses blockchain technology like cryptocurrency and smart contracts instead of traditional means. This automation reduces (if not eliminates) the need for third parties like escrow agents, lawyers, and banks. For financial customers, DeFi offers unprecedented privacy. Since blockchains are pseudonymous, transactions are not tied to a person’s identity.
Markets become simplified, democratic, and free from human error as code takes over. Rather than a central authority for control, there is a central ledger for accountability — the blockchain.
DeFi responds to the declining trust in traditional financial institutions and regulatory bodies with its offer of privacy and financial autonomy.
Buying and selling real estate is notoriously slow, complicated, and expensive. Smart contracts end the need for brokers and reduce transaction fees and time. The ownership deed is on a secure, public blockchain, preventing fraud or legal disputes.
Governments have long been plagued with the cost and reputation of unwieldy bureaucracies. Even attempts to digitise suffered due to weak security and dangerous hacks on citizens’ personal data worldwide. Smart contracts eliminate the need for bureaucracy by replacing it with automation. The public blockchain ledger reduces opportunities for corruption and increases public trust. The accountability and autonomy offered by the blockchain will become a key to democracy.
Insurance is another industry that suffers from a reputation for being slow and unreliable. Smart contracts — automatic, instant, tamper-proof — allow fast claim settlements, reduced operating costs, and increased public trust.
If a traditional transaction is like going to the store to buy something, a smart contract is like a vending machine. It’s faster, more efficient, convenient, and cost-saving. A contract is an essential element of any business agreement or transaction. By adopting this efficient, secure, and traceable form, every company stands to benefit.
Whole new marketplaces and services based on smart contracts — tokenomics, NFTs etc. — are booming, wide open for growth and innovation. Traditional contracts and all their trappings will soon cede to their evolved technological form.