Imagine that you need to quickly import certain goods. On the internet you find information that a company you do not know has it. You are not sure whether you will receive the goods when you pay the price. So you need to create additional security, use intermediaries (e.g. bank), but you care about time. Smart contracts, is a technology that can be an answer to this demand.
Smart contracts, despite their name, are not contracts themselves, they are simply a computer program that uses blockchain technology. The same technology that is used in cryptocurrencies. When setting up a contract, the user writes into it certain rules that are to govern the contract, based on the principle: „if premise x is fulfilled, then y will occur”. In the case in question, if the goods are delivered, then a transfer to the counterparty’s account will automatically take place. In this way, the contract will self-execute if certain criteria are met. Additionally, the specificity of blockchain is related to the fact that, as a rule, the data stored in the code of smart contracts cannot be changed after they have been launched, which guarantees their stability.
There are a number of benefits. First of all, it is the reduction of the human factor in the interpretation of individual provisions of the contract in favuor of an objective assessment of the fulfillment of the conditions specified in the contract, which significantly speeds up trading. In addition, since the contracts are executed automatically, in an automated manner, their codes cannot be changed, and what is more, certain assets are blocked for the contract (money, shipment), the risk associated with an attempt to fulfill the contract is reduced to a minimum. Thus, there is no need for additional collateral or intermediaries (e.g. a bank) who charge a commission. Therefore, the costs of the contract are reduced. The parties do not even have to know or trust each other – contacts in blockchain are concluded essentially anonymously or semi-anonymously.
The application is even wider the more processes are implemented on the basis of blockchain technology. On the basis of this technology a commodity exchange can function, a portal for tracking shipments, to which our contract is connected. The contract can also be linked to a specific register, e.g. the land register – thanks to which the contract „knows” whether our counterparty can dispose of the item. The payment itself can also be made in blockchain – in cryptocurrency. Ultimately, smart contracts allows for automation of almost all processes related to the contract.
Of course, there are also many risks, closely related to the features of the technology itself: first of all, low flexibility in terms of the need for nuanced assessment of the performance of the contract or its changes, as well as anonymity (it is difficult to verify the issues of representation, contractual capacity, and thus the validity of the contract itself). Besides, the technology itself is connected with significant energy consumption. Finally, the discussed solution is still in the legislative „grey area” – there is still no appropriate legal regulation.
Considering the possible applications, however, smart contracts will become more and more common. Leading the way in their use is the insurance industry, but not only. Already in 2020, the voting of the General Assembly of token holders (whose shares were in the form of electronic tokens) and the payment of dividends in the Estonian company Value took place on blockchain.