Blockchain smart contracts are helping enterprises to tackle the problems remained in the cooperation process across parties.
According to Market Research Future’s report, the global smart contract market expects to reach a valuation of $300 million by the year 2023, and the market is set to demonstrate a CAGR of 32% during the review period of 2017 to 2023. The business value of blockchain smart contracts in tackling the collaboration across the entities makes it highly recognized.
What is a blockchain smart contract?
Primarily, a contract means an agreement between two or more parties on the establishment, adjustment, or termination of rights and obligations. Traditionally, a contract can exist in verbal, paper document forms. In light of the rise of computers and technology, a contract can exist in digital form as well.
The term “smart contract” was coined by Nick Szabo – a computer scientist, law scholar, and cryptographer – in 1994, implying the idea of a digital contract that can automatically execute the order by using algorithms without face-to-face meeting or the interference of a trusted third-party to implement the process.
But it was not until in 2008 when Satoshi Nakamoto introduced Bitcoin and blockchain as its underlying technology that Smart contract has become complete.
The point of blockchain smart contracts is to digitally handle business logic in a decentralized database and make the implementation of contract terms to work automatically as an alarm clock.
Smart contract and blockchain is a perfect combination. With blockchain, information used in the “contract” is precise and unchangeable once recorded due to the hash function and consensus algorithm.
A smart contract requires some condition: competent parties, digital signatures, contract terms, and a distributed blockchain platform.
It is factual that smart contracts are popular with transactions that use cryptocurrencies as a financial instrument such as Bitcoin, Ethereum.
Many enterprise blockchain platforms are reinventing the use of blockchain and smart contracts in the daily business operation and gradually eliminating the dependence on cryptocurrencies.
For example, instead of using cryptocurrencies in transactions as public blockchain platforms (like Bitcoin and Ethereum), Hyperledger Fabric deals with transactions by merely using business logic such as a defined token in the chain code. (In Hyperledger, Smart contract is called Chain code).
The mechanism of smart contract in a permissioned enterprise blockchain platform like akaChain is going through some steps: In the beginning, the contract takes data verified on the blockchain database, then peers in the chain will execute the chain code to check whether the transactions are invalid. If yes, peers will sign, creating an endorsed transaction. Finally, to meet the condition of the consensus algorithm, the transaction will be considered successful and recorded on ledger only when collecting enough peers’ signatures.
Smart contracts apply in various solutions of different sectors, typically in Finance and Banking (such as options contracts in securities transactions, Blockchain-based Credit scoring system, eKYC), Insurance Claim, Supply Chain, E-commerce.
How can a smart contract enable frictionless work processes between parties?
The purpose of a smart contract is to simplify the work process between parties while remaining and enhancing the efficiency of executing processes and optimizing cost.
Concerning the traditional written contracts, these are the efficiency of blockchain smart contracts considered via some aspects:
The automatic mechanism:
- Reduce the need for paperwork positions: With traditional contracts or even with rudimentary digital contracts, manual tasks (collect the documents, input data to the contract template, and decide the implementation of the contract) still ensue. A smart contract, instead, occurs entirely and automatically in a digital environment, cutting down or even eliminating the participant of roles that don’t create much value to enterprises.
- Automation also allows a contract to perform in a vast number of transactions at the same time.
- With an automatic mechanism, a smart contract makes daily business operations easier. For instance, notarization vanishes because data is already stored on a distributed database immutably – a unified set of data with multiple verified copies.
The elimination of intermediaries and a trusted third-party:
The role of intermediaries or a trusted third-party is to ensure the terms are compliant by competent parties. But the problems are these parties require a substantial cost to maintain low-value services. Moreover, the risk of data breaches when incompetent parties involved in the process is high.
A smart contract separates data handling tasks to technical tasks to help enterprises to protect their confidentiality.
Enterprises take a colossal effort and use multiple different channels to connect and track the phase of the execution process. With a smart contract, all information is automatically updated, stored, and reported in a unified distributed ledger, which contributes to a better management system.
Stop the misunderstanding of terms:
The language and terms used in a contract should be mandatory to be precise and not to be misleading. Smart contracts on blockchain use language logically to match the algorithm with less complicated terms, facilitating a thorough understanding of the rights and obligations and lowering the semantic conflict.
Time-stamp process and immutability even offer fair and accurate proof shreds of evidence to make it easier to resolve possible contradictions afterward.
Reduce cost and enhance business operation:
More effective process, cutting off unnecessary components are keys to cut off cost and support to a new business operation model transformation.
Besides, geography separation is no longer a problem because all processes perform online, giving enterprises the chance to cooperate with more potential partners and operate more globally.
Blockchain for business, along with the smart contracts, is still at the early stage of blooming. There is plenty of work for enterprise blockchain platforms to do to make this technology more mature in terms of real businesses.
Despite the meager of proven successful applications, according to Gartner, “by 2022, smart contracts will be in use by more than 25% of global organizations.”
The complicated situation probably includes in the early stage of blockchain smart contracts deployment, but once the system operates, you will see the great transformation to both business and law operations and the million-dollar value it holds.
Box: akaChain is an enterprise blockchain platform built on Hyperledger Fabric. With smart contracts and ready-made solutions, akaChain delivers blockchain-based applications to help tackle business problems arising in modern enterprises with optimization.
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