Smart Contracts for Small Business Explained

When someone buys an apartment, begins a new job, or ask for a credit, it´s always mandatory to create a contract between the two or more parties involved in the exchange. This contract specifies and records the terms of the transaction and the required actions of each part. Alone, a standard contract has no power to enforce the terms that it defines. Instead, a legal or governmental third-party oversees the execution of a standard contract, ensuring that each party carries out their end of the agreement. If the terms are not met, the parties must rely on the intermediary to rectify the situation and enforce the contract.

Thanks to recent advancements in distributed ledger technology, lawyers, notaries or other intermediaries are no longer required to oversee contracts. Using smart contracts, people can execute and enforce contracts without middlemen.

A smart contract defines the terms of a transaction via computer code, and also verifies, executes, and enforces the transaction without the need of a trusted intermediary.

To explain smart contracts with an example; it could be compared with the full transaction process executed by vending machines. The machine verifies the payment, executes the transaction, and deploys the product. There is no need for a cashier, a lawyer, or a government agency. Like vending machines, smart contracts fulfill an agreement without middlemen. The parties simply agree on their terms, put a cryptocurrency coin into the program, and then, the smart contract executes the desired digital exchange.

In the case of a seller who agrees to send 100 products to a buyer, for the price of 1 bitcoin per item, by a specific date. This agreement is written into an encrypted smart contract and put into blockchain. Smart contracts need a secure digital infrastructure which can support intermediary free transactions. Distributed ledgers as Blockchain are platforms which enable users to securely transact without the need of trusted intermediaries.

In the case where the buyer doesn’t receive the goods by the specified date, the cryptocurrency will not be released and both parties will be notified of the contract breach without any need for human intervention or supervision.

In terms of the analogy, if smart contracts represent the software that executes a vending machine transaction, a distributed ledger represents the hardware of the vending machine itself.

●    Time-saving. Smart contracts use blockchain software to automate processes through a series of triggered actions which can save time and energy. Eliminating the need for third parties, banks and middlemen also enables smart contracts to dramatically speed up traditional processes.

●    Cost effective. Cutting out costly factors like legal payments and transaction fees.

●    Safe & secure. Although documents are publicly available, the information is encrypted, anonymous, and resistant to hacking. Documents are also duplicated many times on the blockchain so are virtually impossible to lose. Moreover, by extracting third party involvement, smart contracts also eliminate the risk of both human error and external manipulation.

●    Easy: Smart contracts make complex transactions easy. While smart contracts can be used for simple transactions, they can also define and complete intricate, multiparty exchanges with precise timelines. Additionally, multiple smart contracts can be used in tandem to execute even more elaborate exchanges.

Although smart contracts are helpful for small business, there are a few inconvenience to mention.

●    Human Error. The person creating the contract via computer code could make a mistake that affects the whole chain. Although every bug can be fixed eventually, it’s a problem nonetheless.

●    Automatism. One of the main advantages of smart contracts is actually a disadvantage as well.