One of the best things about the Blockchain is that it took out intermediaries and middlemen, allowing anyone to verify a transaction between two parties without requiring third parties. The Bitcoin Blockchain does this for transactions of bitcoin between two wallets using cryptographic digital signatures. But what if we wanted to use the Blockchain for other applications besides transferring money? Or what if we wanted to include more rules and logic with applications involving money? For these use cases, Ethereum was built.
A smart contract can be thought of more easily as a digital self-executing contract. Applications can be programmed such that if certain conditions are met, a certain end result will happen.
It is most useful in cases where human intervention is required today, resulting in a significant amount of time for claims.
Think about a basic insurance policy after a hurricane or earthquake. With a smart contract, we could program rules that specify, for example, that if an earthquake occurs with a magnitude higher than 6.5 on the Richter scale, the insurance company’s Ethereum wallet will immediately be used to send to your personal Ethereum wallet your insurance payout amount.
Given that it’s a computer program, we can of course be even more specific. We could very easily program such a program so that,
- If the magnitude is higher than 6.5 on the Richter scale and your house is within 25 miles of the epicenter, you get paid 100% of insurance payout amount.
- If the magnitude is higher than 6.5 on the Richter scale and your house is within 50 miles of the epicenter, you get paid 40% of insurance payout amount.
- If the magnitude is higher than 6.5 on the Richter scale and your house is within 100 miles of the epicenter, you get paid 10% of insurance payout amount.
All of this can be executed in a completely decentralized way without any third parties or human interaction. This example would save the insurance company from having to staff humans on phones and computers to take these claims and they would save you time and money.
One can easily see an endless number of other alternative use cases or industries that would benefit from a faster, flawless, decentralized smart contract platform, including:
Mortgages, bonds, payments, settlements, insurance, and property records are all activities that require significant third parties and administrators today that could be replaced by smart contracts.
Example: a bond issuance that gets to maturity automatically disburses to bond holders’ wallets.
We saw the largest application of smart contracts starting in 2017 with companies selling tokens or equity in a decentralized and highly scalable way through initial coin offering (ICOs). The way it worked was very simple: if the buyer sent currency to a certain wallet powered by a smart contract, the contract would automatically disburse to him specific tokens in specific types or amounts.
Example: the ICOs used by companies and startups to raise money by issuing tokens
Identity theft is prevalent and a great use case for a trusted decentralized network. When a landlord needs to verify that you are who you say you are and that you have enough money to pay rent, they don’t actually need to get paper copies of your bank account and passport that can easily be stolen or lost. They just need to verify a certain set of conditions in a trusted manner. This is a perfect application for a smart contract.
Example: Mobile apps can remove the need for usernames/passwords that can be hacked or stolen, verifying your identity on the Blockchain in a private and safe way.
Government can use a Blockchain to govern and regulate more effectively. Imagine audit functions that can be embedded logically in a smart contract, taking the need for third party human auditors spending a significant amount of time auditing transactions manually.
Example: Title or property registration on the Blockchain. Once someone has the deed to a land, it’s public information and displayed on the Blockchain without tampering or fraud abilities.