Smart contracts have struck mass public consciousness in a big way in the form of Non-Fungible Tokens (NFT’s). More than $2 billion was spent on NFTs, during the first quarter of 2021 – representing an increase of about 2,100% from Q4 2020. Even Visa is getting in on the NFT craze buying a 24×24 pixel 8-Bit style character for about $150,000. But what are smart contracts, and how are they spreading across a wave of industries?
During the Pandemic, NFT’s containing virtual kittens from the Moon to snapshots of famous tweets and Meme’s became big business. Music, Gif’s and Jpegs all changed hands virtually for vast sums of Crypto funds, with the buyers and sellers never meeting face to face but willing to stump up large amounts of virtual money for the kudos of owning a slice of internet history.
How could they trust that each party would honour the transaction?
NFT’s are a unit of data stored on a digital ledger, called a blockchain. The blockchain certifies a digital asset to be unique and therefore not interchangeable. This statement is the basis of all Smart Contracts – an “automatable and enforceable agreement”. NFT’s are trusted because the whole blockchain monitors, checks, and enforces the transaction.
Each of these NFT’s are changing hands for cryptocurrency in the form of a smart contract, generally using the world’s second-largest coin – Ethereum (ETH). However, other exchanges are quickly adopting NFT support on their blockchains; for example, Cryptocurrency exchange Binance (using BUSD) launched an NFT marketplace in June 2021.
Each smart contract aims to simplify business and trade between both anonymous and identified parties, sometimes without the need for a middleman. Smart contracts scale down on the rigid nature and costs of traditional methods without compromising authenticity and credibility.
When thinking about Smart Contracts, the critical element is trust – delivered by their distributed blockchain ledgers makes them impregnable and immune to alterations.
Sounds great; nevertheless, one of the most significant criticisms of the blockchain is the sizeable computing power and energy consumption required to confirm these Smart Contract transactions. The current process used by leading blockchains is called Proof of Work (PoW), carried out by a computer network pool (often referred to as miners). This process requires large amounts of resources if compared to, say, a more traditional Visa transaction.
The negative optics from inadequate green credentials have become enough for Ethereum to modify how it confirms transactions. At the end of 2021, Ethereum will move to a Proof of Stake (PoS) model, which should help reduce the environmental impact.
Although PoS blockchains still utilise cryptography, the energy consumption is significantly lower than PoW models. PoS does not require miners to solve highly complex puzzles to prove their work on PoS blockchains; therefore, the power of processing needed and environmental impact are much lower.
One of the best ways to make crypto mining and innovations like Smart Contracts more eco-friendly is to support lawmakers who want to encourage mining in regions that already have underutilised energy sources.
Alternative networks are also coming online all the time; for example, the upcoming Flare Network claims to be faster than Ethereum, a decentralised network that brings full smart contract utility to the XRP ecosystem.
But… there’s more to Smart Contracts than collectable NFT’s.
Supporting payments are highly profitable for banks with Cross-border transactions generating $224B in payments revenues in 2019. Blockchain company Ripple has partnered with over 300 customers, including financial institutions like Santander and Western Union, to improve the efficiency of cross-border payments. Their xCurrent product provides banks with a two-way communication protocol that permits real-time messaging and settlement.
Global Goods Trading
Another example, IBM are using the blockchain and their Smart Contracts platform to reduce friction and eases the trading process for participating companies, creating an ecosystem of trust for global trade, e.g., helping the smooth transport of goods around the globe. Their platform (we.trade) helps standardised rules and simplifies trading options, lowering risk and increasing trading opportunities for banks and SMEs. This type of implementation allows frictionless trade between the client, banks and customers, removing slow paperwork and the time needed to build trust between parties.
One Japanese-based start-up Zweispace is even using the blockchain to developing a self-executing Will system. This system will automatically distribute assets of an inheritance trust to beneficiaries upon confirmation of the trustee’s passing, eliminating the need for executors and court battles regarding the integrity of the Will.
Then there’s the massive growth in Decentralised finance (commonly referred to as DeFi) products, utilising smart contacts. These are worthy of discussion on their own.
API’s powering the blockchain
The possibilities for smart contacts and blockchain apps are pretty much endless with the use of APIs.
API’s could enhance in-house compliance systems, user licencing, processes or contractual agreements delivering immutable transactions, meaning no party can alter the content or prevent its enforcement.
In my opinion, the key constraint to the opportunities blockchain could offer clients is simply the Vendor’s imagination and as the world moves ever closer to digital platforms, smart contracts and their benefits will only grow.
More platforms and sectors will adopt innovative Crypto-based tools, with every business able to harness the power of the blockchain.
- Trust – Smart Contracts create an environment of trust as the information in the contract is visible to all participants in the blockchain network.
- Security – As the distributed blockchain ledger is impregnable and immune to alterations.
- Disintermediation – This can enable individuals to enter into contracts with reduced dependence on middlemen.
- Real-time execution (near) – It takes place almost simultaneously for all parties, across participating systems – much quicker than traditional methods.
Disclaimer – This Content is for informational purposes only, and you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Values correct as of September 2021.