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Don’t Sign, Just Click: Exploring the World of Smart Contracts
in Finance

Fundamentally, contracts define the terms and obligations of an exchange between two or more independent parties. Historically, a centralized arbitration was required to confirm that the terms of the contract were being respected. However, with the advent of blockchain technology and smart contracts, we can replace centralized arbitrators with a decentralized infrastructure, thus reducing the risks to all participants while improving performance.

Although a relatively young technology with a wide range of potential applications, smart contracts can cause misunderstanding among people. In this article, we will try to answer the basic questions about smart contracts, how they work, and how they are used in practice.

What is a smart contract?

The term “smart contracts” was coined by computer scientist Nick Szabo in 1993. Inspired by researchers such as David Chaum, Szabo believed that the development of smart contracts through cryptographic protocols and other digital security mechanisms could significantly improve traditional legal contracts. Smart contracts are a revolutionary technology that can completely change the way we do business. A smart contract is a self-executing program that runs on a blockchain network, automating the process of verifying, enforcing, and executing the terms of a contract. Smart contracts can streamline business processes, reduce costs, increase trust, and reduce the risk of fraud. In simple terms, a smart contract - is a code/program stored on a blockchain that runs when predetermined conditions are met. The code is used to enter all the terms of the contract concluded between the parties to the transaction in the blockchain. The obligations of the participants are provided in the intellectual contract in the form of “if-then” statements (for example: “If Party A transfers money, then Party B transfers the goods or something else”). The number of participants may vary, and they may be individuals or organizations. Once the predetermined conditions are fulfilled, the smart contract executes the specified action outlined within the contract.

The computer network performs actions when the specified conditions are met and verified. This may include the allocation of funds to the parties concerned, registration of the vehicle, notification, or issuance of tickets. Participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when...then…” rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes. Then the smart contract can be programmed by a developer. Organizations that use blockchain for business provide templates, web interfaces, and other online tools to simplify the process of structuring smart contracts.

How to create a smart contract?

Creating a smart contract requires a certain level of technical expertise and knowledge of programming languages like Solidity, which is used for developing smart contracts on the Ethereum blockchain. Here are the steps involved in creating a smart contract:

1. Choose the blockchain platform: The first step in creating a smart contract is to choose the blockchain platform on which you want to develop it. Ethereum is the most popular blockchain platform for creating smart contracts.
2. Install the required tools: Once you have decided on the blockchain platform, you need to install the required tools to develop and deploy smart contracts. For Ethereum, you need to install tools like Truffle, Remix, and MetaMask.
3. Choose a programming language: Smart contracts are typically written in programming languages like Solidity, Vyper, and others. You need to choose a programming language that is compatible with the blockchain platform you have chosen.
4. Define the rules and logic of a contract: After choosing the programming language, you need to define the contract logic, which includes specifying the functions and variables that will be used in the contract.
5. Write the code: Based on the contract definition, you need to write the code for the smart contract. This involves defining the rules for how the contract will behave and writing the logic for the functions.

6. Test the contract: Once the code is written, it’s crucial to test the smart contract to ensure that it works as expected. Tools like Truffle and Remix can be used to test the contract and identify any potential bugs or errors.
7. Deploy the contract: After testing, you can deploy the smart contract on a blockchain platform. There are several platforms available, and you’ll need to pay a transaction fee in cryptocurrency to deploy the contract.
8. Interact with the contract: Once the contract is deployed, you can interact with it using a Web3 interface like MetaMask. This allows you to send transactions to the contract and execute its functions. You can also track the contract’s activity on the blockchain.

Congratulations, you’ve successfully created your own smart contract! Remember to follow the contract terms and conditions carefully to ensure it runs smoothly.

The application of smart contracts

Smart contracts have gained widespread use in a wide range of industries, including finance, real estate, supply chain management, and healthcare, for example:

In finance, they have the capability to automate the process of settling trades, making it more efficient, faster, and less costly.
In real estate, they can automate the buying and selling of property, thereby decreasing the need for intermediaries and increasing transparency.
In supply chain management, they can track the movement of goods to ensure that they are delivered on time and in good condition.
In healthcare, they can automate the process of verifying the authenticity of medical records and help patients receive the care they need.

One of the most significant benefits of smart contracts is their ability to decrease the necessity of intermediaries. By automating the verification and enforcement of a contract’s terms, smart contracts can get rid of the need for lawyers, brokers, and other go-betweens, resulting in reduced costs and increasing efficiency. This benefit is particularly essential in industries where intermediaries are expensive, such as finance and real estate. Another benefit of smart contracts is their ability to enhance confidence in business transactions. Thanks to their transparent and automated execution, all parties involved can rest assured that contract terms will be enforced fairly and accurately. This reduces the potential for fraudulent activity and can foster greater confidence in the business process. Smart contracts are also highly secure because they operate on a blockchain network, which is impervious to tampering and hacking. This makes them an ideal solution for industries where security is of utmost importance, such as finance and healthcare.

Real-world smart contracts use cases

Without a doubt, the potential of smart contracts for streamlining business operations is vast. Lots of industries are striving to implement them to reduce costs and automatize a multitude of complex processes. Let’s have a look at the real-world use cases of smart contracts:

Datahash (Supply chain management). Formerly named Entrust, Datahash emerged as Australia’s first supply chain platform specifically designed for the agricultural sector. It utilizes the feature of smart contracts concerning the automatic execution of pre-arranged actions upon meeting all conditions prewritten in the program. In addition, the need for intermediaries and daily management of the flow of goods have disappeared.
Earth ID (Digital identity). Serving as a decentralized identity management platform, Earth ID utilizes the power of blockchain networks with the immutability of data contained inside smart contracts. It provides robust security measures, such as encryption techniques, and offers users full control over their digital data. Through connection to various online platforms, Earth ID also offers counterparties the opportunity to view specific individuals without revealing their identity.
Tune. fm (Music industry). This solution is a vivid example of the industry’s tokenization. Tune. FM specializes in streamlining royalty payments for emerging musicians through instant transactions made following the total number of listenings. The main peculiarity of this application lies in the form of fees, which are represented in JAM tokens with further advancement to real money.
Dropp (Retail). Through smart contracts, this specific solution provides retailers with micropayment for small-value transactions in both cryptocurrency and dollars. It also helps business owners to digitize payroll systems and track their performance in real time, thus enhancing overall business efficiency.

Wrapping up

In conclusion, smart contracts are a powerful technology that possesses the potential to revolutionize the way we do business. By automating the process of verifying, enforcing, and executing the terms of a contract, smart contracts can streamline business processes, reduce costs, increase trust, and reduce the risk of fraud. As the use of blockchain technology continues to grow, we can expect to see more and more businesses adopting smart contracts as a key part of their operations.

At Modsen, we harness the power of cutting-edge technologies with perfect efficiency and stand as a reliable partner, who understands your unique business needs and can help find the right solution to make a real contribution. Embark your journey with smart contracts and our tremendous leverage of blockchain technologies at your side to make your business skyrocket.