In its simplest form, a smart contract is an agreement between two people in the form of computer code, which self-executes when those terms are met.
Think of smart contracts as fancy “if-then" statements, coded on a blockchain to create specific actions in the future. Such actions might include the releasing of funds, sending notifications, executing a transaction or issuing a legal document.
However, the key to understanding their true value lies in what they enable. In our post, we’ll dive into what smart contracts are, their benefits and the implications for the association industry,
But What Are They?
Technically, smart contracts are simply pieces of software code and not contracts. In fact, they are not actually legal documents at all. An easy analogy to understand smart contracts is that of a simple vending machine selling soda.
Once you insert your money and select your soda, the machine is hardwired to either produce your drink or return your money if that soda can is sold out. Just as a soda machine can automate a sale without a human intermediary, smart contracts can automate virtually any other kind of exchange.
The Potential For Smart Contracts
Currently, smart contracts are being primarily deployed in the area of financial services – things like trading, insurance, credit authorization, crowdfunding agreements and other complex legal processes.
However, there are even greater potential uses in the not-too-distant future. These include transferring patient health records securely, trustless voting systems and the handling of company payroll.Other applications include:
The Move to DeFi
Although Ethereum is the most popular blockchain for them, smart contracts can be built on several other blockchains as well. Popular smart contract blockchains include Solana, Polkadot, Cardano, Avalanche, Ergo, Algorand and Tron.
Smart contracts are a big part of what makes blockchain technology so powerful. Indeed, they are the engine behind the rise of the decentralized finance (DeFi) industry. Smart contracts power this through “decentralized applications” or “dapps.” As mentioned, these DeFi dApps can mimic the traditional banking and financial products that are available today – but without the banks and financial institutions attached.
Thus, DeFi apps allow cryptocurrency holders to engage in complex financial transactions, without a middleman taking a cut. As a result, decentralized finance is expected to transform the Banking and Finance industry. One could argue that process has already begun.
Beyond Finance
Smart contract applications extend well beyond purely financial aspects like investing, lending, and borrowing. They can actually be used across a wide array of applications, from gaming and healthcare to real estate and personal identity verification. As an association professional, you can expect to eventually see their usage in the configuring of corporate structures.
Related: How To Talk to Your Members About Web3
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In simple terms, we are now seeing the spread of decentralized autonomous organizations or DAOs. These DAOs effectively function as corporations, though they exist on the blockchain. Yet within these DAOs, certain dynamics like corporate ownership and employee compensation can be built into smart contracts.
DAOs can also drive savings in administrative costs including office space, hiring, and any payroll that may not include formal employment contracts. This last point is of particular interest to companies adapting to the changing workforce of today.
Benefits of Smart Contracts
Regardless of the functionality, smart contracts offer many benefits over traditional legal agreements. These include:
- Speed: Once a condition is met, the contract is executed immediately.
- Accuracy: Because smart contracts are digital and automated, there’s no paperwork to process – and no errors.
- Transparency: Records are shared across participants so there’s full visibility. This removes the need for any third-party involvement.
- Security: Blockchain transaction records are encrypted, which makes them difficult to hack.
- Savings: Since smart contracts eliminate intermediaries, they also eliminate the associated fees and charges.
- Immutability: Smart contracts on the blockchain make transactions traceable, transparent and irreversible.
Most importantly, automating the execution of agreements provides all participants with peace of mind in terms of outcome. Not only does this remove the need for trusted third-party companies, such as banks, but also helps with the decentralization aspect.
Disadvantages of Smart Contracts
There is no question that a world of possibility opens up with this new technology. Yet smart contracts are not perfect, and for all their promise, they also have their disadvantages, including:
- Weak legal regulation of smart contracts
- Processing speed and scalability issues with their underlying blockchains
- Inability to adjust or amend smart contracts
- Dependence on programmers to create them
However, none of these disadvantages are show-stoppers. In fact, it's likely that all of them will eventually be resolved with time and technological advancement.
What You Need to Know
There is no question that smart contract technology will impact the association and business scene in the near future, which is precisely why everyone needs to become aware of them and their possible applications within their industry.
On the operational side, smart contracts will be used in handling the nuts-and-bolts of business administration. Mortgages, insurance, supply chain management, and intellectual property protection will all see smart contract usage grow.
Digital identity, real estate, tax records, and life sciences are also areas that are expected to be impacted by the rise of this technology. The truth is that smart contract use-cases go far beyond those listed here. Regardless of your particular industry, association professionals should expect to be encountering smart contracts in the near future.
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