5.1 Smart contract concepts and use cases

Smart contracts are self-executing agreements written in code and stored on blockchain networks. They automatically execute when conditions are met, eliminating intermediaries and enhancing transparency. Unlike traditional contracts, smart contracts are immutable and deterministic.

Smart contracts have diverse applications across industries, from finance and supply chain to healthcare and gaming. They offer benefits like increased efficiency and reduced costs, but face limitations such as lack of flexibility and potential coding errors.

Smart Contract Fundamentals

Definition of smart contracts

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• Self-executing contracts with terms of the agreement written into lines of code
• Stored and replicated on a distributed, decentralized blockchain network
• Automatically execute when predetermined conditions are met without intermediaries (escrow services)
• Immutable once deployed, the code and terms cannot be changed
• Transparent execution visible to all parties involved (buyers, sellers)
• Trustless eliminates the need for intermediaries or third parties (banks, lawyers)
• Deterministic given the same inputs, always produces the same outputs
• Enables exchange of money, property, shares, or anything of value without middlemen (real estate transactions, stock trades)

Smart vs traditional contracts

• Both define terms and conditions of an agreement between parties
• Both are legally binding and enforceable
• Traditional contracts:
  • Require manual execution and enforcement by parties involved
  • Written in natural language which may be subject to interpretation (English, Mandarin)
  • Can be amended or terminated by mutual agreement
• Smart contracts:
  • Automatically execute when conditions are met without human intervention
  • Written in programming languages like Solidity or Vyper
  • Deterministic and unambiguous, no room for different interpretations
  • Immutable once deployed on the blockchain, cannot be altered

Smart Contract Applications

Use cases across industries

• Finance:
  • Decentralized finance (DeFi) applications (lending, borrowing)
  • Automated insurance claims processing triggered by events (natural disasters, flight delays)
  • Tokenization of assets enabling fractional ownership (real estate, fine art)
• Supply chain management:
  • Tracking goods from origin to destination using IoT sensors (RFID tags)
  • Automating payments and invoicing upon delivery confirmation
  • Ensuring compliance with regulations and standards (organic certifications, fair trade)
• Healthcare:
  • Secure storage and sharing of patient data on blockchain (medical records, test results)
  • Automated execution of clinical trial agreements based on milestones
  • Facilitating exchange of medical records between providers (hospitals, clinics)
• Real estate:
  • Automating property transactions and title transfers (eliminating paperwork)
  • Fractional ownership of real estate through tokenization (time-shares, crowdfunding)
  • Streamlining rental process and security deposit management
• Gaming:
  • In-game asset ownership and trading on blockchain marketplaces (virtual land, rare items)
  • Provably fair gaming mechanics using blockchain-based RNG
  • Rewarding players for contributions to the game ecosystem (content creation, bug reporting)

Benefits and limitations of smart contracts

• Benefits:
  • Increased efficiency by automating processes and reducing manual tasks
  • Enhanced transparency and trust through immutability and transparency of blockchain
  • Lower costs by eliminating intermediaries and reducing transaction fees
  • Improved security by leveraging distributed nature of blockchain (no single point of failure)
  • Enables new business models and opportunities through tokenization and decentralization
• Limitations:
  • Lack of flexibility once contract is deployed, cannot be easily modified
  • Potential for coding errors or vulnerabilities leading to unintended consequences (DAO hack)
  • Dependence on underlying blockchain infrastructure and its limitations (scalability, transaction costs)
  • Legal and regulatory challenges, smart contracts may not be recognized in all jurisdictions
  • Difficulty translating complex legal agreements into code without ambiguity