Understanding the role of smart contracts in blockchain and cryptocurrencies

Most conversations surrounding blockchains are focused on cryptocurrencies and other digital assets like non-fungible tokens (NFTs). After all, these were the first “killer apps” that made good use of the technology and captured the public imagination, cementing blockchain as an important technology milestone rather than a curiosity.

Now, a growing number of financial transactions are being facilitated with mainstream cryptocurrencies like Bitcoin (BTC) as well as privacy coins like Monero (XMR). We’re now in a time when the typical Monero wallet holder is more likely to use their digital currencies to pay for real services and goods rather than as a mere investment vehicle, signaling the proven utility of blockchain technology. 

However, crypto coins and NFTs may not be the most transformative technologies borne out of blockchains. This distinction possibly goes to smart contracts. These are digital agreements that run on blockchain networks that automatically execute actions when predefined conditions are met - eliminating intermediaries and the need for manual enforcement.

Being able to rid once essential intermediaries from contract enforcement may forever change how companies and even governments do business. Should smart contracts become universal, they may significantly reduce financial costs to global economies, possibly to the tune of trillions of dollars.

These contracts wouldn’t be possible with blockchain technology because only blockchains provide the necessary decentralized, immutable, and transparent environment that can enforce the proper use of smart contracts. Perhaps unsurprisingly, smart contracts are widely used by organisations that have already invested in other blockchain technologies such as cryptocurrencies.  

Let’s explore how and where smart contracts are being deployed by blockchain users:

1. Automating Crypto Transactions and Other Contracts

Because they’re self-executing, smart contracts enable much faster transactions, particularly for complex matters. All that needs to be done is to set predefined actions (e.g., transferring crypto or other assets) that trigger once the contract’s conditions are met. This removes the need for intermediaries and their fees, cutting costs and removing once ubiquitous procedural red tape from various processes.

2. Improving Security and Transparency

Unfortunately, it’s not always easy for parties to agree on intermediaries that could be trusted.

This problem has been handily solved by blockchains. Blockchain’s transparency ensures that all smart contract activities are visible to authorised participants, while its immutability guarantees that no one can alter a smart contract once it’s deployed. This eliminates the threat of bad faith or biased intermediaries and significantly reduces the risk of fraud.

3. Maintaining Decentralized Trust

Blockchain networks are often maintained by parties with an ideological commitment to decentralization.

Traditional contracts rely on third-party institutions like banks or legal entities to enforce terms, making them antithetical to many blockchain networks’ users. In contrast, smart contracts use blockchain decentralization to distribute trust across participants, making them far more suitable for blockchain networks. 

4. Facilitating Complex Multi-Party Agreements

The more complex a contract is, the harder it is to enforce, especially with human intermediaries enforcing them. Smart contracts solve this issue and can even automate entire workflows involving multiple parties.

For example, smart contracts are now routinely used in logistics operations to release funds, ship goods, or update records as specific milestones are met. We’re likely to see similar deployments of these contracts in other complex transactions very soon. 

5. Enabling Decentralized Applications (dApps)

Smart contracts are fundamental to modern decentralized applications and are the only way many newer dApps can operate autonomously. These days, they are particularly crucial to dApps involving decentralized finance (DeFi), supply chain management, and other blockchain-based applications, bringing next-generation efficiency to various digital ecosystems.

6. Reducing Human Error and Delays

Even the best human enforcement is always going to be prone to some margin of error.

On the other hand, since smart contracts are executed based on precise code, they virtually eliminate both the human error and delays that are inseparable from manual processes. So rather than waiting a couple of business days for a clause to be in effect in the real world, we can now enjoy near-instant contract executions. 

What’s Next for Smart Contracts and Blockchains?

In business, it’s almost always a good idea to cut out the middleman. After all, most middlemen don’t provide that much added value beyond giving access to the actual goods or services.

You only retain them if you have a specific reason to do so since their connection fees can drain your resources very quickly. And if you look at things from a macro perspective, the currencies and contracts upon which business relationships are built are almost fully dependent on these middlemen.

As with cryptocurrencies, smart contracts are upending the old order of things, revolutionising business by cutting out obsolete third parties and replacing them with more secure and trustworthy automated processes. Blockchain technologies will probably not make all the thousands of in-betweens we used to depend on disappear overnight. However, they will doubtless result in a new level of financial efficiency for businesses and other organisations.

Even today, smart contracts are becoming more integral to businesses involved in areas like supply chain logistics, real estate, finance, healthcare, and beyond. As more of their uses are vetted in real world scenarios, more operations will leverage them as essential tools wherever decentralized, trustless solutions are needed.