The internet is full of the latest development in decentralized finance, or DeFi – smart contracts are now more important than ever. You might think you missed the coronation, but in reality, smart contracts are only used in a small corner of the cryptocurrency world, even though they are worth billions of dollars. It’s a promising concept that has come a long way in business.
Despite the headlines and cryptocurrencies, smart contracts are not overrated. The ability to conduct secure and complex business transactions is a barrier that keeps many people out of business completely. In addition, every major company in the world will seize a real opportunity to cut costs due to the endless legal costs associated with business transactions. While it is daunting and costly, unfamiliar business partners need to develop a sense of trust between them to ensure contractual work is complete. Smart contracts can simplify this process and reduce costs for everyone.
While all this is real and exciting, smart contracts are almost exclusively used in the world of cryptocurrencies. Despite billions of dollars pouring in through smart contracts, they remain trapped in this speculative world of cryptocurrency trading. What are smart contracts and what does it take for these transformational promises to become a common process?
What makes a smart contract?
There is nothing smart about smart contracts. Like SpaceX and Chumbawamba, smart contracts are poorly named. The easiest way to understand smart contracts is to think of them as computer programs. Like any contract, these programs bring two or more parties into a binding agreement together. While traditional contractual agreements rely on paper (even digital), and are prominently legal and consensus-building, smart contracts are relatively simple, fast, and flexible.
Smart contracts are a natural evolution of blockchains and related distributed ledger technologies, or DLTs. Because of the transparency and consistency of DLT, smart contracts bring parties together through security and trust. Before the advent of blockchains, the idea of digital contracts was out of the question because not everyone wanted to provide digital trust and security.
The legal due diligence and scrutiny required for contract work is replaced by code and automation in smart contracts. When two or more parties enter into a smart contract, the contract is saved automatically in ideal safe conditions. This helps companies save time and money while opening up more opportunities. So why are you waiting? Why are smart contracts not common?
It will not cost you
Since most smart contracts are built on the blockchain, each transaction requires a fee for block verification and entry into a DLT. The reason for the fees is that blockchains rely on the two miners to perform proper data processing by adding new blocks to the network. No fees mean there is no incentive for miners and will not lead to new transactions. So, blockchains have fees, but worse still, the fees are volatile and volatile depending on network traffic and currency rankings.
On this topic: Waiving fees is the only way to secure blockchain adoption.
If you are a business owner considering migrating parts of your business to a smart contract that supports blockchain technology, then payment issues can be a big problem. If you are someone looking to use blockchains to protect yourself in a business transaction, the fees associated with smart contracts can be very expensive. The zero fee structure would be ideal, but the fees must be transparent and stable so that people can fit smart contracts within a budget.
The most popular smart contract platform in the world right now, Ethereum, is getting more and more expensive to use the more popular it becomes. This is the opposite of the way the company is supposed to operate, and a clear sign of a fundamental flaw in the smart contract design.
Stuck in a cellar
Email is a great tool that transformed the way you do business. Imagine if email was only possible between users of the same service. If so, we might see some limited email transactions in large offices, but certainly not on a regular basis.
Smart contracts do not currently have this interoperability. This means that if one company wants to enter into a smart contract with another company, then the two companies must operate in the same cryptocurrency. This can lead to limited communication between closely related business partners, but the separation of different protocols in silos will never be widespread.