How Smart Contracts Are Disrupting Traditional Business Models

Imagine a world where business deals are executed and committed through a set of electronic agreements that do not require any brokers, lawyers, or an endless stream of documents. All exchanges of value through smart contracts occur on a permanent and highly resistant digital database known as a ‘blockchain’, which allows all parties to transact instantly, self-police their obligations, and embody mutual trust. Presenting to you a new concept in the market known as smart contracts a technologically enhanced feature that is slowly creeping into the market to change the way we operate.

In the last decade of its use, blockchain technology has evolved from purely being a digital currency system and returns as self-executing contracts with provisions written specifically into algorithms or what is commonly known as smart contracts. These contracts are revolutionizing the traditional business models in all sectors, not just for technology enthusiasts. Smart contracts are revolutionizing business making the work faster, and cheaper, and ensuring high levels of trust and transparency.

 

Smart Contracts: What Are They?

A smart contract is a virtual digital agreement created on blockchain technology that automatically executes the terms of the contract when certain conditions are met. Some contracts will rise into force as soon as conditions are met and the legal work goes on itself. Smart contracts are digital self-executing programs characterized by the fact that they run on a blockchain network without involving a third party such as an attorney or notary.

This is how they operate: A smart contract becomes virtually unalterable—which means it cannot be altered in any way—once deployed on the blockchain. The unprecedented security and assurance to all parties result from a certainty that a contract’s provisions will be performed in a precise manner as agreed.

Today, smart contracts are readily available due to prominent blockchains like Ethereum that allow software programmers to create numerous forms of dApps and perform contracts that don’t require intervention from a third party.

How Smart Contracts are Shifting Business Models

1. Getting Rid of Middlemen

Smart contracts are shaking standard business models mainly because they eliminate several intermediaries. Intermediaries present in various industries such as financial, estate, and legal, including brokers, agents, and lawyers, are relevant to the performance of checks and balances of various transactions. Often they amplified the costs, time, and overall complexity of business processes at the middle level.

These intermediaries are no longer required because smart contracts facilitate instead of executing the contract and verifying it. For instance, the real estate industry can benefit from a smart contract whereby as soon as the parties meet the conditions of the contract, ownership of a particular property is transferred as a way of eliminating the need for a real estate agent and the legal system for sales and purchases. This minimizes costs and enhances the efficiency of a transaction process than if it was done manually.

2. Reducing Cost and Enhancing Output

Companies alone will spend over many billion yearly on legal fees, compliance, and related tasks. Since many of the processes implied in corporate transactions are handled within smart contracts, these costs can be greatly reduced. Smart contracts save time because they perform the work independently; there is no need for much documentation or checking.

Take for example usage of Smart contracts, in the insurance industry where claims can be set off based on contractual terms automatically without the need of personnel intervention. Suppose there is a car insurance policy wherein as soon the blockchain identifies met aspects of the weather conditions that were reported on an accident, there is processing of reimbursement for the claim. Money and time would also be saved since claims processing would no longer involve many people and this would not require human interference.

3. Strengthening Trust and Transparency

The common law contracts often have inadequate communication so the parties are confused about whether they agreed on different aspects of the contract. While smart contract offers full transparency, unlike P2P contracts where people tend to hide certain facts because the terms of the contract are recorded on the blockchain. It is impossible for one party to unilaterally alter the conditions of the contract after these have been negotiated because these contracts are not capable of alteration.

This openness promotes trust, which is especially important given that trust is important in fields such as supply chain management. For example, smart contracts can replicate a product’s lifecycle in the hands of the producer, intermediate, seller, and eventual consumer to ensure that every process performed within a particular lifecycle is documented and verified. This way, the movement and origin of the product can be proven, and chances of fraud are minimized besides making certain moral conduct.

4. Transform the logistics network.

Known to be revolutionizing many business undertakings, the industry that has the highest impact on smart contracts is the supply chain business. Traditionally, supply chains depend on several communicated, verified, and documented forms of the process, and at some stages, it leads to blunders, time, and money waste. Smart contracts mean that all the partners, including manufacturers and suppliers, distributors and retailers, are to operate within a single platform.

According to this idea, there are several aspects to stating that the various stages of smart contracts are automotive and verifiable. For example, a supplier might have an application-layer contract in blockchain that whenever a cargo is delivered and the validation is done, payment is automatically made. This way, some of the delays are prevented, and the suppliers are paid promptly.

5. Enhancement of safety and the reduction of the fraud rate

Smart contracts benefit from the enclosed endpoint security mechanisms of blockchains as they operate as applications on diverse decentralized blockchains. Each transfer is protected by encryption and the plain record of all contracts is kept in a no rewritable list. This makes sure that there is no tampering with the agreement because the hackers are hardly able to do it.

In addition, smart contracts help reduce fraud by abolishing the need for people’s intervention with transactions within blockchains to be performed and signed manually. Every aspect is written into the blockchain and thus terms of the contract cannot be altered or forging and signing can happen.

6. The Internalization of Financial and Legal Industries

Smart contracts are probably the most disruptive in the legal and financial industries. In the framework of the legal services industry, smart contracts enable one to perform several monotonous tasks, such as forming and fulfilling contracts, which reduces the demand for expensive lawyers. For example, as simple contract signings become more efficient in various activities in the process, lawyers may shift towards specific activities.

Currently, smart contracts are being used for several processes in the financial industry inclusive of lending, investing, and banks. Other examples include; self-executing contracts for buying and selling tokens, issuing and repaying of loans through smart contracts and thus reducing costs for human monitoring.

Smart Contract Difficulties

There is no perfect world where smart contracts do not have different disadvantages even though they offer numerous advantages. One of the main concerns is the belief that smart contracts are as good as the code on which they are based. An error in coding might cause the contract to malfunction as intended and could lead to losses.

Legal recognition is another challenge well known. Although more and more often, smart contracts are a topic of discussion, many legal systems still do not recognize their authority or their enforceability in court. Legal systems are most likely to have to adapt to the development of technology to allow for the use of smart contracts.

Conclusion

Smart Contracts and Organizational Dynamics Smart contracts have emerged as a force that is revolutionizing how organizational activities occur; they are more than a trend in technology. Smart contracts have great empowering potential for several industries: supply chain, real estate, banking, and legal services. They will benefit from getting rid of the intermediaries, reduced costs, increased openness, and enhanced security.

Of course, the benefits of creating smart contracts are apparent even though there are some challenges to address. As more automation and decentralization are introduced to the world, it may be required that traditional company frameworks adapt or get left behind.