If one attempts to scratch the surface of the history that led to Bitcoin, Nick Szabo is a name sure to come up quite often. Back in the ’90s, Nick was a prominent member of the Internet Cyber Phunk Group. He was also the founder of BitGold, a precursor to Bitcoin. Some people consider that if it wasn’t for BitGold, Bitcoin would’ve never been conceived.
In 1996, Nick Szabo wrote a paper titled “Smart Contracts: Building Blocks for Digital Markets” that contained an introduction to a self enforceable contract to be written and executed on the internet. It tried to explain a conceptual idea of a fully automated and enforceable digital agreement. Since then, Smart Contracts have become one of the greatest trends within Blockchain. Arguably Smart Contracts have single-handedly driven the rate of adoption.
The Advent of Rampant Automation
One of the ideas put forward by Nick Szabo when explaining smart contracts was the necessity of a platform to ensure that such agreements are machine-readable and fully automated. In simple words, a machine must be able to understand the terms stated in the contract and ensure that they are carried out without any hindrance.
The introduction of Blockchain, as a layer for executing, rekindled the interest of Smart Contracts. Blockchain, that is as a platform for the removal of trusted intermediaries, acts as a budding ground for the development of Smart Contracts.
Why Smart Contracts?
Vitalik Buterin, the founder of Ethereum – the biggest platform for Smart Contract development, views the area as a crucial innovation in distributed systems. He defined a smart contract as being “a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in, and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated”.
Neither Smart nor Contracts, Smart contracts are lines of code that are stored on a blockchain. These lines of code automatically execute commands when the predetermined terms and conditions are met. At the most basic level, Smart Contracts are programs that have been set up to run a specific task. Simple agreements like the exchange of services, transfer of ownership rights, ICOs, etc. are easily managed by a Smart Contract.
The Benefits of a Smart Contract are most apparent because:
- Smart Contracts remove the need for a trusted central coordinator. By using a Blockchain as the base layer, Smart Contracts get rid of any single point of failure
- Smart contracts are irreversible on the blockchain. Once published and propagated, Smart Contracts cannot be hindered or removed unless the conditions are met or a clause for reversal has been included.
- The immutability of Smart Contracts ensures that the agreement is fulfilled by all the parties involved
Role of Smart Contracts in Industries 4.0
Blockchain and smart contracts are certainly not the solution to every business problem. But at its core, business is trade, the exchanging of values and ownership. By simplifying the processes under a single platform, blockchain proves itself to be a welcome update to the current business model.
The benefits of smart contracts are most apparent in business collaborations. As Smart Contracts bring in automation and enforceability to an agreement, they form an attractive low-cost alternative for industries that rely on third parties for enforceability. Smart Contracts can be trivially used as alternatives to enforce agreements, automate obligations and perform predetermined functions.
Let us look at some of the use cases of Smart Contracts in the Industrial World
Banking and Finance
If anything, Blockchain has the biggest influence on disrupting the Finance sector. Bitcoin, a self-proclaimed successor to sovereign forms of exchange, has been the greatest threat to organizations worldwide rooted in finance. Now, with the introduction of Smart Contracts and their promise of intermediary-less automation, services provided by banks and financial institutions can be made more efficient and cost-friendly to help them stay in the game.
Retail and Shopping
A welcome innovation in the day-to-day tasks of shopping, Smart Contracts promise a new model for consumers to exchange goods and services and make payments. When focusing on retail, we are not necessarily talking about the process of being and selling. There are a lot more components to retail and shopping than that.
In 2018, IBM conducted a study about how blockchain can reinvent the consumer experience in the retail sector. The study goes into detail about the possible improvements and updates that blockchain could bring in. Among the most crucial updates, tracking and tracing reliable delivery throughout the retail process, and accountability of suppliers was seen as the most crucial.
Clearing and Settlement
It is easy to visualize that the use of a blockchain platform for clearing and settlement can drastically reduce the time, cost and counterparty risk associated with any transaction. A recent report by the Depository Trust & Clearing Corporation (DTCC) observed that “… using DLT (Blockchain) would make settlement instantaneous, therefore abolishing the need to post collateral – freeing up capital that could be used for other purposes.” For this reason, Smart Contracts are crucial as they will be the gateway for traditional products to transform into better and upgraded services.
In March 2017, Maersk was chosen as ground zero for testing one of the first real-world applications of a supply chain based DLT. It was developed by Hyperledger in collaboration with the IBM Watson IoT. The test involved the combined effort of three separate enterprises, four different technological platforms, and two separate jurisdictions. The test was successful as it implemented a globalized digital cross-industry data communication mechanism with no cost and increased efficiency.
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