We have already presented some possible uses for Blockchain technology in previous blog posts. But did you know that the term Smart Contracts is often used in connection with the Blockchain? In this blog post, we explain to you what Smart Contracts are all about.
What are Smart Contracts?
Smart contracts can be understood as computer programs that run according to the “if-then” principle. For example, “If date A is reached, then the invoice in the amount of B is transferred to company C”.
Now the question arises why this should be done with Blockchain technology and Smart Contracts. Its use makes sense if you want to (and can make) the intermediary superfluous.
Many of you have certainly heard of crowdfunding platforms or used them yourself. Let’s assume you want to support a project with a sum of X on Kickstarter. If the financing goal is reached, then Kickstarter collects the money due from the individual supporters and transfers the money, minus the due commission, to the project manager.
If we implement the whole thing as Smart Contracts, then we would eliminate Kickstarter as an intermediary. Supporters could register their interest directly with the project. Also here the target amount would be reached after a certain time or not. The program would then either transfer the amount or not.
Smart Contracts – Pros and Cons
As with all technologies and processes, there are always pros and cons to Smart Contracts. One of the advantages of Smart Contracts is the elimination of the middleman. This reduces costs. In addition, the program can immediately evaluate the underlying conditions, which shortens the processing time. By combining Smart Contracts with Blockchain technology, all parties involved can check the code and the transactions themselves. This makes the whole process more transparent and secure.
Of course, there are also disadvantages. If there is an error in a Smart Contract, it will remain forever. This is because the data in the Blockchain is persisted forever and can no longer be changed. To change this, you would have to provide the option of switching to a new and corrected Smart Contract. Interaction with a Smart Contract is also not so easy.
So there are advantages as well as disadvantages for Smart Contracts. Let’s look at a few specific cases to better understand the direct use of the technology.
Smart Contracts for financial service providers
In the financial industry, Smart Contracts can help to make financial transactions more efficient and secure. Unlike an open system, a financial services provider can control the Blockchain node itself and assign access rights to brokers, customers or other partners.
Examples include foreign exchange transactions or lending, which involve manual effort and the exchange of documents. Here, a Blockchain app that Smart Contracts can handle could help to drastically reduce effort and accelerate processes. In addition to financial service providers, processes in the insurance or leasing industry are also candidates for Smart Contracts.
Smart Contracts as Gamechangers in Sports
Contract management is one of the core activities of professional sports organizations, such as football clubs. Every athlete in every league and sport, whether professional or amateur, must sign a contract today. These contracts are complex constructs that not only deal with an athlete’s salary and, if applicable, bonus payments, but also with codes of conduct or even appearance requirements for public appearances.
Every season, professional clubs have to negotiate dozens of contracts with athletes, agents, consultants, family members or private sponsors. Various departments are involved in the clubs. These include controlling, human resources or the respective department of the club (football, basketball, …).
The current process in most professional clubs still runs with the classic paper contracts, which are faxed or sent as email attachments. These transaction processes are largely inefficient and error-prone. They also require a lot of time and energy to track or consolidate changes.
All contract data or transaction information can be entered via Smart Contracts in the Blockchain. These are then available to all participants in real time. This eliminates the intermediate instances that have to verify or certify a contract. At this point we do not want to go into such a system in detail, but all parties can sign the contract digitally from their desktop or mobile device as soon as an agreement on the contract has been reached. The system can then implement contract clauses even after the contract has been signed without external intervention by an accountant or trustee.
The system could then review thousands of information sources in a matter of seconds and automatically execute contract terms immediately. A concrete example of this is the payment of bonuses. If the player has completed a defined number of games, the system pays the bonus payments to the player.
In many areas there are possibilities to implement Smart Contracts with the help of the Blockchain. It is important to define your use cases and to check whether they are suitable for implementation with Blockchain technology.