Five Ways To Use Smart Contracts To Revolutionize Your Business

Smart contracts are self-executing agreements in which the terms and conditions are embedded directly within code, operating on blockchain networks. By removing the need for intermediaries, smart contracts enhance efficiency, security, and transparency in business operations. Their implementation allows businesses to automate transactions, bolster data integrity, and streamline workflows.

In 2023, the global smart contracts market size exceeded $1750 million. According to Zion Market Research, this figure will grow at a CAGR of about 24% annually to reach $9850 million by 2030. There is a growing number of organizations and individuals for whom the use of smart contracts has become commonplace. In this article, five powerful applications of smart contracts that can transform businesses across industries are discussed.

What is a smart contract?

The term smart contract means a transactional protocol or a program that automatically controls and executes the terms of the contract.

Blockchain allowed for the storage of information about each data chain, which in turn was stored with each network participant. This empowered smart contracts by making them as informative and secure as possible.

History of the emergence of the smart contract technology

The concept of smart contracts was first proposed by American scientist Nick Szabo in 1994.

Szabo considered smart contracts to be computerized transactional protocols that fulfill the terms of a transaction. In his paper, the scientist argued that the technology should minimize the need for intermediaries and malicious outside influence.

“Digital money protocols are a great example of the use of smart contracts. They allow online payments while retaining the characteristics of paper money [...]. We need a protocol that guarantees that a product will be delivered if the buyer has paid for it, and vice versa. Smart contracts have the potential to significantly reduce the costs of many commercial transactions,” Sabo said in the paper.

Even then, the scientist outlined the basics of decentralized finance. However, these theoretical concepts worked only in 2009 after the emergence of Bitcoin.

Using the example of the first cryptocurrency, it became clear how smart contracts set and control the fulfillment of the conditions set for transferring digital assets between users.

The first smart contracts allowed the transfer of cryptocurrencies from one address to another if the user signed the transaction with a private key and had enough coins in the account.

The next landmark event for the development of the technology was the publication of the Ethereum network white paper in 2013. Author and blockchain founder Vitalik Buterin described the concept as a “base layer” that goes beyond just creating financial protocols.

“Ethereum with its built-in programming language allows any user to write a smart contract and create a decentralized application with its own rules,” the paper said.

Advantages and disadvantages of smart contracts

The use of smart contracts increases the security of asset or information transfer agreements by eliminating the need to involve a counterparty, such as a bank or broker, in the transaction. The entire process of fulfilling the terms of the contract is automated.

Thanks to blockchain, the result of a smart contract is permanently stored in a registry, which also makes it impossible to change or falsify it.

Thus, the advantages of a smart contract are:

• automation of routine processes;
• reliability;
• security;
• efficiency of transaction execution.

It is worth noting that the inability to make changes to a smart contract can also be considered a disadvantage of the technology. If a smart contract with an error or vulnerability is introduced into the blockchain, it cannot be removed.

For example, in Q3 2023, hackers stole $93.27 million by exploiting bugs in smart contracts. To prevent this, projects consult auditors like CertiK.

In addition, a smart contract cannot operate on its own with data outside the network. Blockchain oracles like Chainlink are needed to do so. This hinders mass technology adoption, as many applications receive information from outside the network in real-time (e.g., weather forecasts).

How Smart Contracts Revolutionize Businesses

So, let`s discuss 5 ways to use smart contracts for your business.

Automating Payments and Transactions

One of the strongest advantages of smart contracts is that they have the ability to automate payments. The contracts ensure payments are delivered in real-time when certain conditions are met, reducing reliance on banks, payment processors, and other third parties. Automation lowers the likelihood of human mistakes, prevents fraud, and speeds up the entire payment process.

How it works? Smart contracts contain the payment terms and automatically make transactions upon fulfillment of triggers, such as confirmation of delivery, project milestones, or completion of service. Payments are securely and transparently made without human interference.

Benefits:

• Instant, tamper-proof transactions
• Lower transaction costs due to less reliance on intermediaries
• Improved security and fewer opportunities for fraud

Companies that make cross-border payments can use stablecoins like USDT (Tether) in smart contracts to facilitate payments in real time. For instance, a shipping firm can have a payment contract with a supplier. After the blockchain confirms that the shipment has arrived, money will be transferred without paying for expensive wire transfers or exchange fees.

Making Supply Chain More Transparent

Supply chain management is often bedeviled by counterfeiting, late shipment, and visibility. Smart contracts increase transparency since they give a permanent record of all transactions, tracking goods from the origin to the destination in real time. This makes supply chain participants responsible and reduces fraud.

How it works? Smart contracts document each transaction of the supply chain from production to delivery, automatically guaranteeing authenticity and compliance with the regulations. RFID tags and IoT sensors may be attached to blockchain platforms to track and authenticate conditions such as temperature and location.

Benefit:

• Improved product traceability
• Automation of regulatory compliance
• Improved trust among supply chain members

Walmart and other retailers use blockchain-based smart contracts to track shipments of food. If contamination is detected in one batch, the source is identified right away, allowing retailers to recall only the contaminated products instead of the entire shipment. This saves them money and keeps consumers safe.

Streamlining Legal Contracts and Regulation

Traditional legal contracts require elaborate documentation, manual verification, and legal advice, which creates inefficiencies as well as expenses. Smart contracts are computer programs that automatically execute digital contracts and enforce agreements without constant legal intervention.

How it works? Legal agreements such as employment, lease, or partnership agreements may be codified in smart contracts. Some hot AI startups already incorporate smart contracts. Once the conditions are satisfied—e.g., rent due or work accomplished—the contract enacts pre-coded actions such as transferring title, releasing funds, or issuing fines for nonpayment.

Benefits:

• Enforcement of legal agreements simplified and expedited
• Fewer instances of third-party involvement from lawyers
• Fewer opportunities for disputes

Businesses can use smart contracts for rental agreements, where the rent is charged from a tenant's wallet automatically on the payment due date. In the event of default in payment, the contract can also automatically send notice or charge a penalty, reducing the amount of paperwork for landlords and property managers.

Better Digital Identity and Security

Handling digital identities is necessary to prevent fraud, secure transactions safely, and authenticate users properly. Centralized databases applied in conventional identity verification are vulnerable to data breaches and hacking. Smart contracts provide a tamper-evident, secure, and decentralized solution.

How it works? An identity system based on blockchain allows individuals and organizations to store and verify credentials without sharing sensitive information. Users own their information and grant access only when necessary.

Benefits:

• Improved security and privacy
• Lower risk of unapproved access
• Faster and more secure identity confirmation

Banks are implementing blockchain-based KYC (Know Your Customer) models in which the customer provides evidence of identity once, and it is securely exchanged with multiple banks or service providers without having to fill out forms repeatedly. This reduces onboarding time, eliminates redundant verification processes, and improves customer experience.

Redefining Loyalty and Reward Programs

Legacy loyalty programs are siloed, difficult to monitor, and prone to fraud. Smart contracts offer automatic, secure, and transparent loyalty programs that improve customer engagement and loyalty.

How it works? Smart contracts automatically issue and redeem reward points. Customers get tokens from purchases, which can be redeemed instantly for rewards without the need for third-party validation.

Benefits:

• Fraud-proof reward systems
• Instant issuance and redemption of rewards
• Increased transparency and trust

A chain of coffee shops might have a loyalty program based on blockchain where a token is sent to the buyer for each buy. The tokens can be converted into discounts or used at any store without relying on a central database, with transactions being effortless and tamper-proof.

Conclusion

Smart contracts are revolutionizing business processes with increased automation, security, and transparency. With smart contracts, organizations can make their processes:

• More efficient
• Reduce costs
• Build trust among stakeholders

With the advancing maturity of the technology, firms employing smart contracts will be more competitive, promoting innovation and growth. This is the moment when companies should explore smart contracts and implement their full potential for the company of the future.