Thinking of getting a loan for education? Is your Business planning to invest in a foreign company? Superficially these things might look easy, but on the inside, it’s a whole different story. Banks or companies, in general, don’t just trust someone on face value. They need to know that you can be trusted. This is where contracts come into the picture.
Traditional contracts are those which have been in use for a long time & consists of a lot of internal processes that might just make you dizzy. These also consist of reliable intermediaries so that activities like loans or investments can be done properly. However, the whole process is very expensive, takes up a lot of time, needs your physical presence & might even involve lawyers to draw up contracts.
However, with the advent of a groundbreaking technology called Blockchain, contracts are set to go digital. Smart Contract which is based on Blockchain Technology is a robust alternative to a traditional contract. A few benefits of smart contracts include reduced costs, excellent security due to encryption methods, less time consumption & non-requirement of physical presence. Read on to know about Blockchain and how it is used in a smart contract.
Blockchain is a distributed ledger in which transactions are digitally recorded & linked together. It is simply a chain of blocks i.e. Digital Information (Block) which is stored in a public database (Chain). Wait? Public Database? Isn’t it risky? Well, it is not.
A transaction or a digital entry gets added to the Blockchain after it is verified & validated via a consensus protocol (majority wins!) While it is being entered, robust encryption of data is done to maintain high-level security. This exciting technology boasts of a benefit called immutability – the records cannot be changed or altered since if you try to change you, you need to change all and it isn’t possible at all!
What is a Smart Contract?
Smart contracts use Blockchain Technology to initiate a contract for seamless exchange of property, money, information or any other thing. Since Blockchain tech is based on decentralized ledgers via peer to peer nodes, it doesn’t require any intermediaries accelerating the contract finalizing process.
Smart Contracts can be used in Business collaborations that need a certain type of agreement/contract for seamless transactions of information or money that doesn’t involve any middlemen. Other smart contract applications can be found in Trade finance, Proprietary ownership, mortgages, insurance, voting, peer-to-peer transactions and more,
What do Smart Contracts do?
Let’s take a simple example. You want to buy a car but you don’t have the complete amount to pay upfront. Then you might have to go through the following steps:
- Obtain Financing
- It’s not that easy to get financing since it will require a credit check
- You might have to fill a lot of forms
- Identity Verification
- Interaction with a lot of middlemen like lenders, finance brokers & others
All of this work needs to be compensated resulting in piling up of costs which are eventually added to the price of the car.
But, Smart contracts can easily bypass these complex methods & middlemen due to its robust security, reliability & faster access to the data. Let’s look at how smart contract changes your car purchasing:
- Your identity along with other important details such as your credit history, previous debts & more are securely stored on a blockchain.
- Lenders can easily decide on financing your car purchase due to the reliability of the data.
- A smart contract is created between the lender, the car dealer & your bank.
- Funds are seamlessly released to the dealer.
- The lender will hold on to the car’s title until the full repayment is done.
- The complete ownership of the car is automatically transferred to you as all the transactions are securely recorded to the blockchain.
If you look at the whole process, it looks seamless with almost no hurdles at all! Thus a Smart Contract can do wonders for many businesses which deal in transactions, exchange of information & other allied activities reducing costs while ensuring robust security, transparency & reliability of data.