All about smart contracts

One of the best examples of the digital transformation we know today is the concept of smart contracts. They have allowed to transform traditional contract signing processes into efficient, practical and secure steps. In this article I tell you more about smart contracts. You will see how to implement them in your company and what are their advantages.

What is a smart contract?

The concept " smart contract " was first coined by engineer Nick Szabo in 1994. He defined it as "a computer capable of executing the protocol clauses of a contract." To explain it in a simple way, Szabo himself used the example of vending machines, where one party inserts a coin into the slot, then selects a product and the machine finally delivers it.

Now let’s imagine this same functionality with financial products, but instead of using an ATM, we will use a virtual machine that resides on a blockchain. This is where our imagination can run wild. It is not uncommon to hear some smart contract gurus talking about a philosopher’s stone that can solve virtually all of humanity’s problems, from corruption to global poverty. Unfortunately, it won't be like that.

A smart contract is nothing more than a small computer program. What essentially differentiates them from other programs is their ability to transfer value (money or other digital assets) natively and without the need for intermediaries. Smart contracts are part of the same trend as fintech.

What are smart contracts?

These are self-executing digital documents that use technology to ensure the execution of signed agreements. They are also known as smart contracts. Before a document is generated, its terms and penalties are programmed. When the parties sign the agreement online, the requirements are activated automatically, making it easier to bill and track processes.

The validation of the rules of the smart contract is done through the blockchain. The blockchain tracks the data shared by one or both parties, allowing for direct communication and providing more security to the process with encryption. With the information automatically updated in the agreement, appropriate actions are taken without the risk of change or fraud. Smart contracts have 3 characteristics, as defined by lawyer and cryptographer Nick Szabo.

• Observability, which is the ability to monitor performance of the contract;
• verifiability, by which the execution of the document is proven; Yes
• Confidentiality, ensuring that only managers have access to process execution.

By using this method, the company is free from intermediary institutions and has greater freedom to manage its affairs in the way it deems most efficient and correct with the customer or supplier. In addition, without the risk of losing the document or having a bureaucratic billing or processing problem.

What is the purpose of smart contracts?

By using smart contracts, organizations attempt to automate the secure execution of contract terms and rules. In other words, it allows digital tracking of chords from the start. The generation of documents automatically includes payment data after their electronic signature.

Smart contracts also aim to allow the user to control contract expiration, generate reminders, and perform search using theartificial intelligence in the document. In addition, they propose a language different from that of the legal vocabulary. Since everything is done with programming, the clauses must be clear so that the system can interpret and follow the recommendations. This eliminates doubtful points and reduces manual errors in contract management, making the new method safer and more reliable than the conventional method.

How to apply the smart contract?

There are different technologies that allow a company to properly follow its clauses and rules. Insurance contracts, for example, require an information base to know the degree of risk and an integrated payment system to automatically release compensation upon receipt of information relating to the claim.

There are other tools that can also be applied. They are :

1.Artificial Intelligence

Every technology that enables automation, digitalization and intelligence is well integrated into the world of smart contracts. By integrating with artificial intelligence systems, you can identify the associated risk and even block the conclusion of a contract, for example. Check out this article to learn more about artificial intelligence.

2. Guided form

The Guided Form can be used to direct affected parties to the best type of settlement for a particular case. This improves the accuracy of information and enables faster responses, reducing the time between document creation and signing.

3. Electronic payments

Electronic payments allow automatic collection or settlement of payment at the end of a contract if a payment delay related to the document is identified.

4. Reactive signing

Responsive Signature, a feature that allows access from any device, regardless of screen size or original format. It is without zooming or complicated actions to view the contract, making signing an agreement quick and easy. In fact, using this digital process in your business will speed up the invoicing related to a document. With the application connected to the Internet, you can monitor the data and take relevant actions under the terms of the contract.

It will all depend on the type of control your company needs to keep track of the applicable clauses and rules. Different technologies must be acquired, such as an information database to regulate a contract, integrations with third-party systems and digital formalization of contracts. With these types of controls, there is no paperwork for the validation of agreements. You will reduce errors in contract management, in addition to having an easier time reading a contract.

Benefits of using smart contracts

• Autonomy: You are the one making the deal; there is no need to rely on a broker, lawyer or other intermediaries to confirm it. The danger of manipulation by a third party is eliminated.
• Trust : your documents are encrypted in a shared registry.
• Backup: your documents are duplicated several times.
• Security: cryptography, website encryption, protect your documents.
• Speed: smart contracts use software code to automate tasks. They thus reduce the number of hours for a number of business processes.
• Savings: smart contracts allow you to save money by eliminating the presence of a middleman. For example, you will have to pay a notary to witness your transaction.
• Accuracy: Not only are automated contracts faster and cheaper, but they also prevent errors.

Applications of smart contracts

Contracts can be applied in new forms of financing and crowdfunding. For example, there is the issuance of tokens on the Ethereum network with ERC20 type contracts, the creation of payment channels such as those used by the Lightning Network or the decentralization of the collaborative economy.

In addition, there is the possibility of making insurances linked to inputs outside the blockchain, via oracles or services which “ inject » data from the outside world into the blockchain so that it can be used by smart contracts. However, smart contracts also pose new challenges from a legal perspective. They are not subject to any specific jurisdiction and are not subject to interpretation.

What lawyers and engineers agree on is that blockchains will bring with them new opportunities. They also bring new business models and a radical change capable of improving processes in which intermediaries have struggled.