May 10, 2022
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,
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.
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:
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.
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.
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.
Regardless of the functionality, smart contracts offer many benefits over traditional legal agreements. These include:
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.
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:
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.
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.
If you’re ready to increase your membership organization’s revenue, connect with an entire community of purpose-driven leaders and grow yourself, we’re ready to help you do it.Learn More
Marc spent 27 years as a sales leader on Wall Street's algorithmic/A.I. trading desks in New York City. He is founder and CEO of a content strategy firm, Anvictus, which serves FinTech and Blockchain scale-ups. Marc has published several hundred articles and videos on sales strategy through content. His work has been featured in media such as Bloomberg, Traders Magazine, CNBC and various business podcasts.