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Smart Contracts: How they work

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What is a smart contract? 

Smart contracts are contracts that are executed by themselves when certain rules are met. The rules and the terms of an agreement, between two counterparts are written into lines of code. Those contracts allow transactions and agreements to be completed among anonymous parties, without any need of a third-party authority.  

Which are the characteristics of a smart contract? 

  • They are immutable, as no one can change what has been programmed
  • They are self-executed when certain rules are met in many stages 
  • They are self-verifying, because of their automated possibilities 

What are the benefits of adopting smart contracts? 

The adoption of smart contracts provides a unique way of automating processes.  Specifically, smart contracts provide:  

      1. Autonomy: By executing an agreement via a smart contract, there is no need for any third-party or intermediate entity to confirm it. The network manages the execution automatically, making it invulnerable to manipulation or corruption. 

      2. Trust and Safety: Smart contracts are cryptocontracts, thus data is encrypted by secure algorithms that are hard to be hacked or lost. 

      3. Speed: As there is no need for intermediates, smart contracts are executed on the time that they are programmed to do so. Also, smart contracts terminate the existences of bottlenecks and paperwork, making the process move with high speed. 

      4. Accuracy: As the process becomes automated, errors that occur from human misbehavior are eliminated.

Which sectors do smart contracts disrupt? 

Smart contracts have the significant potential of eliminating intermediate parties and central authorities that are currently needed in order to execute an agreement. The main fields that face this risk is legal and financial services as they require high fees from their clients.   

Additionally, Vitalik Buterin, the co-founder of Ethereum has also stated that with smart contracts, there is no need for recurring payments such as subscriptions, donations, dividends, etc. All these instances can be solved by executing smart contracts. 

What are some potential uses cases for smart contracts? 

The flexibility of smart contracts not only set conditions but also execute terms of contracts as well, enables them to be used in a variety of use cases in many different sectors. Some of them are: 

  • Ownership Tracking 
  • Digital Identity 
  • Trading of Financial Products (Derivatives and Securities) 
  • Assets and Land Titles Transfers 
  • Supply Chain  
  • Health Check-ups 

How smart contracts can revolutionize workflows? 

Automated Workflows are already considered as a type of smart contracts because of the fact that they execute the conditions that need to be met. In some cases smart contracts give a major advantage in automating workflows, especially in B2C cases where companies need to act rapidly in order to decrease response time and avoid delays.  

Workflow automation doesn’t require to be accompanied with smart contracts in all instances. There are some cases that need meticulous investigation of issues and they should not proceed automatically. They are in a pending status that requires a human confirmation before being executed. However, as the blockchain technology rises, every business leader should consider this opportunity to improve his daily operation within the company, which leads to higher profitability and customer satisfaction.