Smart contract applications, limitations & future outlook
January 9, 2024
A smart contract is a programmable electronic protocol stored on a distributed ledger that automatically enforces itself when certain conditions embedded in its code are met. Smart contract development is commonly used in finance, real estate, and supply chain sectors.
the CAGR of the smart contract market size from 2023 to 2030
Grand View Research
the value of the smart contract market in 2022
Grand View Research
Smart contracts adoption by industries
While smart contracts have proven exceptionally useful in various industries, the BFSI segment receives the most benefits from smart contracts, followed by healthcare and logistics.
Scheme title: Global smart contracts market by industry
Data source: grandviewresearch.com — Smart Contracts Market Report
Financial services
With the mainstream adoption of cryptocurrencies like Bitcoin and Ethereum by both individual investors and financial institutions, including banks, blockchain technology and smart contracts work as a technological backbone for P2P transactions, automated claims processing, and various auditing processes.
Healthcare
Healthcare institutions are increasingly using smart contracts technology to address the complexities of sensitive medical data management. Healthcare organizations leverage smart contracts with built-in transparency and security to streamline patient data privacy management, clinical trials and research, as well as drug traceability.
Logistics & supply chain
Logistics and supply chain is the next biggest contender for smart contract adoption. Payment settlements, inventory management, order processing and tracking, regulatory compliance, dispute resolution, and origin verification are some of the many other areas where smart contracts can enhance visibility and enable automation.
Leverage the power of smart contracts in your niche
Top smart contract use cases & real-world examples
Trade clearing & settlement
Trade clearing and settlement are notoriously resource-intensive yet one of the most vital processes in the finance system. Self-executing smart contracts can autonomously handle most paperwork and digital identity, KYC, and AML verification procedures. Their adoption can reduce operational costs, decrease settlement times, and make particular markets more liquid. All parties can see if there are any updates to the smart contract conditions, because any changes are immutably recorded on Ethereum or any other blockchain platform, providing a trusted historical record.
Insurance claims processing
Smart contracts can help insurance companies streamline lengthy claims management by automating claims validation and execution based on predefined conditions. When an insured event occurs, the smart contract can automatically assess the data from an on-chain source or Internet of Things-powered sensor and execute payouts, eliminating the need for mediators. Moreover, smart contracts substantially increase trust between parties in the insurance industry, as everyone can access a single source of truth on the blockchain network.
Decentralized finance (DeFI)
With the help of smart contracts and DeFi, organizations in the BFSI landscape can streamline lending, borrowing, trading, and asset management. DeFi can be used to create decentralized exchanges by enabling peer-to-peer exchange of assets and eliminating the need for an intermediary. DeFi solutions and decentralized applications can also automate portfolio management by rebalancing portfolios based on predefined rules.
Healthcare
Record-keeping
Blockchain is capable of maintaining a unified database of all healthcare records so that any medical professional from any authorized healthcare organization can securely access the medical records of any patient. The same concept can be applied in a single hospital. The use of smart contracts help ensure that only authorized individuals can access patient data while guaranteeing that patients have full ownership of their information.
Clinical trials management
Smart contracts can help healthcare institutions to accelerate and optimize clinical trial management processes. First, the implementation of smart contracts can automate the verification of eligibility criteria, speeding up the enrollment of participants. Secondly, trial-related data can be stored on the immutable ledger, improving transparency and increasing stakeholders’ trust. Third, smart contracts can automate the compensation payouts to trial participants.
Logistics
Supply chain management
Supply chain traceability remains one of the top concerns for logistics. Smart contracts can help track the journey of both physical and digital assets. At every stage, supply chain participants can record transactions on the blockchain, ensuring that all participants, including end-users, have access to a tamper-proof record of product authenticity and origin. Blockchain-based traceability is especially important for ensuring the safety of pharmaceuticals and food products and streamlining regulatory compliance.
Real estate
Construction
Contracts of different kinds underpin the absolute majority of construction processes. Sometimes, traditional contracts can be interpreted in several ways, leading to resource-intensive dispute resolutions and management. In combination with IoT data analytics, smart contracts can help the construction industry streamline productivity and speed up payment processing. For example, by using computer vision-enabled cameras, the system can detect when a supplier delivers materials and automatically transfer funds to that supplier. This effectively eliminates intermediaries and frees up employees from some manual tasks.
Moreover, smart contracts can streamline invoice processing by matching the invoice with the scope of work and the list of completed tasks recorded on the blockchain. In this case, a contractor’s manager validates the completion of tasks, and smart contracts automatically ensure that the task has been completed within the parameters specified in the invoice.
Land registry
Currently, land title recording is often risky, fragmented, and cumbersome. The process involves real estate agents examining piles of documents regarding mortgage confirmations, property ownership, construction-specific certifications, and buyer-seller agreements. These manual processes are often the reason for document alteration and, consequently, fraud.
A designated blockchain token can contain all the relevant information about the particular property, including the owner and buyer IDs, legal descriptions, and third-party testimonials. In order to verify IDs, the seller rehashes the digital file and the buyer verifies it with their public key. By the very nature of blockchain, such a process of property transfer makes fraud almost impossible, as the wrongdoers would need access to the public keys in addition to injecting malware into every digital copy on the ledger simultaneously.
Media & entertainment
Royalty distribution
For the longest time, the media industry has been battling complexities associated with property rights handling and royalty distribution. Music, movies, and assets can be tokenized on the blockchain, meaning that everyone involved in the network can see exactly who and when claimed IP rights on a particular asset. Furthermore, for example, in the music industry, royalty calculation and distribution can be entirely automated, ensuring that artists are always paid fairly and on time.
Gaming & NFTs
Non-fungible tokens (NFTs) have emerged as a unique way of representing ownership of a specific item, be it art, music, video, or a virtual in-game item. While the concept of trading in-game items, like character skins and collectibles, has been around for decades, gamers haven’t truly owned these items because they were stored on a centralized server. NFT-based items, on the other hand, are stored on the blockchain. This enables greater interoperability because gamers can easily trade items and assets across multiple games.
Implementation barriers & potential solutions
Smart contract bugs
Smart contracts are bug-prone
Smart contracts are still a relatively new technology that is yet to be fully explored and understood by the development community. Smart contract engineers are constantly discovering new bugs and coming up with best practices. Therefore, smart contract development calls for an unconventional development approach along with some definitive measures to minimize the risk of failure:
- Have a plan for failure
Especially if it's a non-trivial smart contract, developers have to be ready for bugs to slip through. Companies should have a clear protocol for pausing smart contracts to minimize the amount of automatic transfer of funds between parties. - Deploy in phases
In general, it’s advised to approach smart contract rollout iteratively. Deploying phase by phase, gradually expanding the user base, and continuously testing before and after each deployment are all crucial measures for safe smart contract implementation. - Prioritize clarity over performance
While most software development initiatives don’t tolerate any compromises, smart contracts are a definitive exception. So companies should ensure that the contract logic is as simple as possible, use ready-made code when applicable, and focus on clarity rather than performance. While it’s tempting to optimize code for performance, it will most likely increase its complexity, leading to more errors.
External data manipulation
Smart contracts are susceptible to external data manipulation
Value-adding smart contracts often rely on oracles to execute terms. They connect blockchains to external systems, allowing smart contracts to execute terms using data from the real world. Therefore, in many cases, smart contract performance depends entirely on the quality and accuracy of external data. Here are some steps you can take to mitigate risks associated with external data manipulation:
- Use multiple oracles
Сross-check external data against multiple external data sources. Smart contracts can be programmed to execute terms only when data from multiple oracles matches. - Use fallback mechanisms
Given that oracles are controlled by a third party, there can be unforeseen situations where external data becomes unavailable or unreliable. This is why companies should come up with a fallback mechanism. They can use historical data instead of real-time data or simply pause smart contract enforcement. In any case, involved parties should have a clearly defined plan for what should happen if the oracle is unavailable.
Unlock the true power of blockchain with smart contracts
AI & smart contracts
While AI holds immense potential for advancing smart contract performance, reliability, and development, there are currently two actionable use cases:
Engineers’ helping hand
The most widespread application of AI in smart contracts revolves around assisting engineers in creating, testing, and maintaining smart contracts. For example, Etherscan, one of the most popular tools for blockchain scanning for Ethereum, introduced a tool that uses AI to help users better interpret the terms of smart contracts. SettleMint, a low-code blockchain application developer, announced the integration of an AI assistant to help developers streamline smart contract development, data integration, and QA.
Smart contract security improvement
The next most feasible application of AI in smart contracts is security improvement. AI models can identify potential security flaws in the smart contract code by detecting unusual deviations from the expected workflows in real-time. Currently, a generative AI company ChainML is working with Web3 security company Cube3 to develop a machine learning model for real-time identification of fraudulent crypto transactions poised to catch hackers off guard. Recently, Cube3 has been selected as the first blockchain cybersecurity company for Mastercard’s Start Path Blockchain Program.
However, some researchers note that in this context, AI’s potential is currently limited by susceptibility to adversarial attacks, regulatory issues in regard to data privacy, and lack of scalability.
Smart contracts are a transformative force
Smart contracts and blockchain development are the next step in digitizing the business landscape. With entirely online partnerships already a standard, smart contracts play a pivotal role in making transactions more transparent and reliable for all parties involved. While it can take some time for organizations to restructure their processes around smart contracts, the expected long-term returns of using this technology seem to be unmatched by any other technology, especially in finance, insurance, real estate, and healthcare. If you want to outpace competitors in your industry by integrating smart contracts, consider turning to an experienced smart contract development vendor like Itransition.
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