Smart Contracts and their Global Impact

Introduction

First proposed in 1994, smart contracts are self-executing agreements on blockchain networks that host pre-programmed data and are set to revolutionize industries. As inefficiencies from unnecessary intermediaries become more prevalent against blockchain and sustainability concerns grow around the world, the development of energy-efficient applications only supports the need for smart contracts. The most concrete attribute they provide is immutability, which means once a contract is deployed, the code cannot be changed. They run on a decentralized network of computers that have to agree that the data is valid, and once they do, the contract is stored away to be viewed on a public ledger anywhere in the world. Their performance and accessibility boost security, transparency, and trust across networks and industries such as real estate, finance, mortgage, insurance, voting systems, supply chain, etc. The power of blockchains with a global standard of data records grants new capabilities for tokenization. The applications and use cases of smart contracts seem endless, and as more industries integrate them, the more useful they become. Let’s dive in!

Industry Specific

Real Estate

Real estate is the largest asset class in the world, and smart contracts will enable these assets to be tokenized. These assets that were once limited to only the wealthiest investors in the world can now be broken down into tokens, which will allow for fractional ownership. The benefits of this functionality can not be overstated! For once in history, blockchain is forcing industries to rebuild from the bottom up. Real estate markets will be broken down to its utility value and not inflated by debased currency or conglomerate landlords. This will break down entry barriers for the broadest range of investors and level the playing field.

As we learn more about the capabilities of smart contracts and NFTs (non-fungible tokens), the dynamic nature of these technologies will help document new developments onchain. Smart contracts can automate property listings and details so the transfer of ownership is as seamless as ever. In the midst of ownership transfer, they can also hold funds in escrow to be released when predefined conditions are met. Additionally, with the development of ZK-proofs (Zero-Knowledge Proofs), ownership can be transferred without any knowledge about either party - this can greatly increase privacy, security, and transparency. Blockchain enables all data and transactions to be in real-time so the process can be streamlined, easily accessible without intermediaries, and reliable. Verification of deeds, zoning regulations, and other documentation can be done efficiently without any delays. All of these steps add up in the costs currently incurred when purchasing a property and can eliminated with blockchain technology.

Banking/Finance

If there’s one sector that is primed to feel the wrath of smart contracts and blockchain technology, it would be banking and finance. Current traditional banking leaks an unfathomable amount of energy and money from hard-working people, not to mention the waste in paper products when everything is recorded digitally anyway. To automate processes that were once written down on a paper ledger, smart contracts streamline manual operations, minimize human error, and increase efficiency. Tokenized assets will represent actual ownership with verifiability on a global blockchain ledger, enabling interoperability across the worldwide banking industry. Major banks are piloting smart contract solutions for instant settlement of international transfers, with many launching their own coin or platform for central bank digital currencies (CBDCs). This will reduce costs on all fronts, eliminating intermediaries and discrepancies with proof on public ledgers and validated by blockchain networks.

As TradFi transitions to DeFi, financial services will become completely decentralized, so no one person or entity can control the process. DeFi enables users to lend and borrow on platforms like Aave or Compound, which use smart contracts to complete services automatically across liquidity pools from ecosystem suppliers. These liquidity pools have also transformed the trading of tokens instead of order books with a new method called Automated Market Makers (AMM). Additionally, smart contracts automate earning rewards across these DeFi protocols with yield farming. The trust in transaction data is revolutionary in reducing fraud, increasing scalability, and breaking down technological complexity.

Governance/Voting

Voting systems hold manipulative narratives every election, for good reason, and programmable smart contracts can change this. Building voting systems on blockchain eliminates manipulation and the need for a central authority to authenticate voters, reducing the need for intermediaries. Authentication can be done decentralized, ensuring only authorized voters participate, potentially using biometrics or other security features to cast a vote. Smart contracts can automate vote counting, eliminating human error and providing real-time results without delay. As seen in the TCIG content above, there are six main steps in the technical implementation of smart contracts that coincide with any process. Here’s what it can look like for voting systems:

Identify Agreement/Set Conditions = Election parameters - the contract owner initiates setup.

Code Logic = Voter/Candidate Registration - eligible voters and approved candidates are added to the contract.

Encryption to Blockchain/Execution and Processing = Voting Process - voters cast votes in a specific time period that are then encrypted on the contract.

Network Node Update = Vote Counting - votes are automatically tallied and the node is updated when the period ends.

Overall, using smart contracts for voting systems is one of the most beneficial ways to increase transparency between government parties. With blockchain processes, there are no backdoor ploys or distrust from the people because it breaks down that barrier for careful consideration to a public ledger anyone can view. Moreover, getting voters onchain can increase participation because eligible voters can do so from the comfort of their home on their phone, but most likely will need to be in a specific geographical region/location related to their identification to cast the vote. This can reduce costs by automating administrative processes currently done by humans and increase trust that the vote can be verified on the blockchain, granting instantaneous and accurate results. There are some important hurdles to cross to become mainstream, but the benefits of getting our elections onchain are endless.

Decentralized Autonomous Organizations (DAOs) implement this similar approach, making decisions using a bottom-up management system. DAOs are organizations managed by smart contracts entirely, where members collectively cast decentralized votes for proposals. There’s no central authority and all operations are rules programmed into code that run on smart contracts. They are community-driven and operate token-based governance, allowing anyone to participate in the process. Some of the largest DAOs in existence are Uniswap, Aave, MakerDAO, LidoDAO, Curve, etc. Approved proposals are then executed by smart contracts automatically, creating a system of reliability, efficiency, and equality. Smart contracts enable the delegation of power in much more flexible ways than traditional voting systems. Democracy is given back to the people with blockchain initiatives, and governments will all realize that the transition is simple; instead of putting it in writing, put it in code!

Supply Chain

Supply chain has to be the most obvious use case of smart contracts, with the ability to track items from one point to another on the blockchain. For example, tracking how our food supply makes it to the table is needed to ensure the authenticity of goods from origination. One of the most pressing issues around the world is food quality, and being able to verify ethical and sustainable sourcing is currently either falsely mislabeled or manipulated to make it seem better than what it is. The same goes for luxury goods, knowing for sure if they are counterfeit items or not. The tracking ability on blockchains will revolutionize our supply chains, boosting end-to-end transaction authenticity. Once goods are received and verified, smart contracts can also trigger payments to process automatically, eliminating the need for invoicing or payment delays. This can lead to automating basic dispute resolutions that currently waste unnecessary time and energy.

Some other ideas around supply chain that smart contracts can address include tackling complex multi-party transactions where multiple stakeholders are involved, knowing each one received its goods or services. The audit trail is all recorded on the blockchain, which, again, is a public ledger where all stakeholders can see what is going on and what stage it is at. This can also lead to more sophisticated processes like quality control and inventory management with IoT (Internet of Things) integration. With sensors or other tracking devices, smart contracts can automatically relay information about where products are in the cycle. This creates a tamper-proof environment that is needed in so many industries today. Reducing fraud risks and improving trust and transparency in transactions is the overall goal of smart contracts.

Environmental Impacts

To reiterate from above, the current traditional financial systems in place for decades leak unfathomable amounts of energy, which is essentially what produces the technology behind the foundation of Bitcoin and other PoW blockchains - energy. Slowly, and then suddenly, the world is realizing that initiatives like Ethereum and other PoS chains are transforming energy consumption. When Ethereum merged to PoS (Proof-of-Stake) in 2022, its goal was to reduce energy consumption by up to 99.95%. Many blockchains are working to become carbon-negative, reducing or reversing carbon emissions and boosting efficiencies in other sectors. If our operating systems are all automated, the human race can focus on other meaningful ways to make an impact on the world. Some projects are even using smart contracts to automate carbon credit trading, which is a market-based approach providing financial incentives to reduce greenhouse gas emissions that can bought or sold on exchanges. Besides capturing underutilized or spillover energy for digital asset computing, renewable energy sources are taking over the majority of the power needed to mine. These include Arctic mining cities, nuclear/geothermal farms, grid-scale operations, volcano mining, etc. Blockchain initiatives are the way to zero waste and zero emissions.

Regulatory

With everything in life, there are always barriers to consider within the confines of the law. As tps (transactions per second) increase and the number of smart contracts minted envelopes the planet, there’s a real need for auditing services that ensure contract security and compliance. Additionally, the importance of accurate programming is imperative to the blockchain because it is extremely difficult to change once a block is added to the blockchain. Challenges in cross-border enforcement are also a factor, with different jurisdictions drawing their lines in the sand for what is allowed within their digital asset laws. Adapting to the evolving rules is challenging, but it will be worth it in the end as balancing the transparency of blockchain with data protection becomes more prevalent.

Future Applications

Undoubtedly, this transformation will spur enormous innovation in the industry, opening doors to technologies we never thought were possible. The traditional financial systems we know of today will have to develop frameworks that include the use of smart contracts. As technical complexity and scalability increase, new skills and educational resources will also be needed for a mutual understanding within the financial sector.  Aside from this, helping others understand how they can be applied will be important to drive acceptance and value throughout. Here are some very plausible future applications of smart contracts:

1. Smart Cities: As cities become more consolidated to increase sustainability, smart contracts can be used for a number of things, such as automating actions based on AI insights like adjusting traffic lights or initiating maintenance tasks. Algorithms identify patterns and predict issues that can be programmed for data collection and stored in contracts. IoT sensors can also be deployed to gather real-time data on energy consumption, air quality, areas of waste, etc.

2. Predictive Maintenance: With the combination of AI and IoT, smart contracts can monitor equipment for maintenance updates and failures, reducing downtime and costs, and increasing safety.

3. Decentralized Autonomous Vehicles: Open-source frameworks for autonomous vehicle services where smart contracts can automate payments, maintenance, performance updates, insurance claims, and dispute resolutions. Having vehicles share data on blockchain can help us make our roads safer and make more informed decisions based on real-time blockchain interactions between users and service providers.

Blockchains for Smart Contracts

Ethereum - Smart contracts gained prominence in tandem with blockchain technology, particularly after Ethereum’s launch in 2015. Ethereum continues to dominate smart contract settlement, with projections showing a trend of over 50% through 2033. Ethereum stands as having the most developers of any blockchain so the suite of tools and the capacity in which they can deliver is high but the coding and block time finality is slower than other blockchains. When the network is congested, it does experience high gas fees and scalability challenges. To address these challenges, protocols like Polygon, Arbitrum, Optimism, etc. work to process transactions and contracts off-chain and send them to the chain to be validated. This helps scale all metrics behind the chain.

Binance smart chain - Binance or BNB, or now rebranded to Build and Build, is another chain working to lower fees on Ethereum and is EVM-compatible. BNB is more centralized than some other competitors but still poses a strong output of contract finality.

Solana - SOL is rising aside ETH as a great alternative to tokenizing RWAs through smart contracts. SOL has a theoretical throughput of 65k+ tps and boasts extremely low fees, which can challenge other chains. The network has occasional instability issues but overall is an impressive blockchain ecosystem.

Cardano - ADA is a solid platform for smart contracts with a core sustainability focus. With a slower development pace than others, they may not be able to keep up as well as others, but the work that they produce is authentic and peer-reviewed.

Polkadot - DOT has a complex architecture so scalability isn’t the strong suit but they pose as an internet of blockchains with the focus on interoperability. The chain has high security with many notable projects using the infrastructure.

Other chains that are in line with these include Algorand, Cosmos, Avalanche, Sui Network, etc. As demand increases, the need for more chains to develop faster, stronger, and more reliable networks is imminent.

Conclusion

The evolution of smart contracts represents a transformational shift in many industries, leveraging blockchain technology to increase performance, transparency, and security. By automating processes in sectors like real estate, finance, governance, and supply chain management, smart contracts remove the need for intermediaries and reduce operational costs. Their ability to facilitate fractional ownership of assets democratizes access to investments while streamlining transactions and increasing trust through verifiable ledger inputs. The integration of smart contracts into voting systems promises to strengthen democratic strategies by ensuring valid and unmanipulated election results. In addition, as the adoption of decentralized autonomous organizations (DAOs) increases, the field of governance is shifting toward more participatory ways that empower individuals.

Looking ahead, smart contract capabilities are substantially robust. As cities evolve into smart environments, these contracts look to automate city management duties based on real-time records obtained from AI data/IoT devices. Innovations such as predictive maintenance and decentralized self-driving cars may redefine operational efficiency across sectors. However, the rapid growth of smart contract technology also requires careful consideration of regulatory frameworks to ensure compliance and protection. As we navigate these challenging and exciting times, the promise of blockchain and smart contracts to create a more sustainable, fairer, and efficient destiny remains a compelling vision for international infrastructures.