Why are smart contracts important?

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Why are smart contracts important? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by IBM Blockchain, providing blockchain solutions, services and expertise, on Quora:

Udit Sharma, Business Account Executive, US Public Sector:

Why are smart contracts important?

“A smart contract consists of computer code that constitutes a set of rules agreed upon by the concerned parties. When these pre-defined rules or conditions are fulfilled, the smart contract executes itself and provides the output.

Normally, while executing agreements involving various stakeholders, a third-party scrutinizes and verifies all the information making it a complex and time-consuming process. Smart contracts simplify it by eliminating the third party and automating the process, enabling the stakeholders to directly transact with each other.

Smart contracts give the freedom and convenience to enter into transactions with interested parties from all over the world without worrying about trustworthy verifiers or middlemen. The inherent encryption mechanisms present in smart contracts ensure security, trust and tamper-proof process.

It has the potential to disrupt industries such as banking, insurance, e-governance, telecommunication, health, education, entertainment among many more.

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Let us see how smart contracts can impact industries through some examples:

Government: One of the ways in which smart contracts can radically transform governance is by introducing transparency in taxation process. Currently, salaried employees remit taxes via their employers who acting as intermediaries collect and coordinate information. Using smart contracts, the process can be fully automated where employee enters their income details directly into the government tax portal built on smart contract technology. It can calculate the tax to be collected based on data input and automatically deduct it from employee account thereby completely eliminating the intermediary, resulting in a simple, timely and cost efficient, transparent payroll tax process.

Healthcare: Healthcare is a sector riddled by data tampering, data exploitation and middlemen. By introducing smart contracts in patient health records, these problems can be mitigated to a large extent. Patient records are important in two ways: they are critical in diagnosis and preventing administration of wrong drugs, and they contain sensitive data that can be misused for marketing or malicious purposes. With the help of smart contracts, patient records can be digitized and encrypted with access limited to authorized individuals, ensuring that data will not fall into the wrong hands.

Education: There are a multitude of ways in which smart contracts can transform the education landscape. Digitizing student records, certificates and badges with authorized access only is one way to increase trust and transparency. Another potential use of smart contract is to track and validate student and faculty attendance to sanction student’s course credits and faculty’s salary according to the hours recorded in the system. This will ensure transparency in the system and also reduce paperwork. Smart contracts can also be used to distribute student scholarships by coding the necessary criteria in the system and releasing scholarship when all the conditions are met by the student.

Supply Chain: Smart contracts can revolutionize supply chain by providing a single version of truth for all stakeholders in a system that is fraud-resistant and resilient. They can be used to manage the approvals of workflow and authorize material transfer automatically on completion of necessary formalities encoded in the contract. Companies can bypass the conventional ways of creating trust thereby saving time and money; and also reduce paperwork and middlemen.

Financial Sector: Financial sector is one of the domains that will be significantly affected by the introduction of smart contracts. Trust is paramount in financial dealings and the industry is riddled with intermediaries and processes that exploit this inherent characteristic. Numerous examples can be provided to elaborate this point, one such case would be:

Banks have strict conditions to provide loans and most of the small sector businesses fail to meet them making it difficult for them to raise funds. This is where micro-lending from alternate sources comes into picture. It enables borrowers to accept loans from individuals by putting their assets as collateral. The parties can enter into a smart contract with clearly coded instructions to liquidate the collateral to repay the loan in case of defaulting. The platform can also monitor the value of collateral and keep it secure to prevent the borrower from using it to raise funds from elsewhere. On repayment of loan, the contract will release the collateral back to the borrower. Peer to peer lending can affect the economy at a macro level and provide a boost to small scale businesses.

Even in such cases where processes currently run smoothly, smart contracts can immensely improve the status quo, bringing about a drastic change in the way we conduct business. Prevailing systems may become redundant in the near future leading to the extinction of many erstwhile processes and procedures. For example, claims verification, credit ratings, loan disbursal, property sales etc. will no longer require the assistance of established firms or intermediaries. Gone are the days where people used to vouch for each other — smart contract has found a way to digitize trust.”

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