If you ever bought a used car, you know the drill – go search for listings online, contact the seller, review and the vehicle and set the payment terms. You also know how many things can go wrong in the process – you may be sold a stolen car; the seller may never transfer you the ownership documents after receiving the payment and so on. That is unless you refer to some sort of middlemen – a bank or a legal representative – to mediate your deal. But is it the only option?
Blockchain has become a powerful alternative to validating and securing transactions between the two parties, who do not completely trust one another or want to have additional guarantees to make sure their deal will not be breached or compromised. Instead of legal lingo, your agreement can be validated in code in form of a smart contract.
What is a Smart Contract?
To recap, a smart contract is a computer protocol, designed to optimize transactions between different parties and agree on the terms and their execution without involving a central authority. In short, smart contracts can offer the following benefits:
- Create and enforce clauses based on the programmed logic.
- Two or more parties can approve the execution of the contract transaction independently. For instance, the approval of certain transaction will happen only if 10 out of 15 members will validate the new block to be added to the blockchain.
- Smart contracts allow creating secure escrows with a third party (e.g. a bank or a cryptocurrency wallet). The funds can be only redeemed once the parties meet all contract conditions.
- The data stored on the smart contract is tamper-proof and cannot be modified without approval of all parties or reversed altogether.
So far, smart contracts have generated massive interest among the traditional financial institutions. According to Accenture estimates, investment banks alone could save up to US$12 billion annually by implementing this technology. Additionally, smart contracts could help solve the next pain points for financial institutions and their customers:
Reduce the financial fraud. According to FBI, US$40 billion per year is lost to non-health insurance fraud in the US alone. The number is more staggering on a global scale. Smart contracts bring a higher degree of immutability and security, and at the same time – remove the need for centralized approval, meaning there’s a lesser chance of human fraudulent intervention in the operations.
Reduce transaction costs. This can be best illustrated with an example. Sending US$20 from the US to the Philippines via Western Union will cost you a flat US$4 fee, plus 4% foreign exchange fee. The beneficiary will receive only US$15.15 and the exchange rate will be far from great. Smart contracts can eliminate the need, and thus the costs, of using the middlemen, when transferring money and reduce the transaction costs to roughly 1%.
Smart contracts use cases are not, however, limited just to the financial market. A bunch of other industries could massively benefit from additional transparency, security and agility that smart contracts enable. Here are the three most curious use cases so far.
Computing Power Exchange
The demand for public cloud computing power has been growing by 50% annually according to Cisco. By 2019, over 500 zettabytes (ZB) of data will be produced by all people, machines, and “smart things”. Processing and operationalizing such huge data becomes a massive challenge for the tech industry.
Right now when you need more computing power, you go and rent it from a commercial data centre or a cloud service provider. Oftentimes, the onboarding process can be complicated and extended, plus the costs can be somewhat inhibitive for smaller companies.
At the same time, most of us have at least one gadget – a laptop, PC, GPU, smartphone – that remains idle for most of the day. So how about renting that hardware and its computing power to someone who needs it? Altumea enables you to do just that. Using smart contracts, this new startup wants to connect GPU owners with researchers, scientists and basically anyone in need of additional power to perform some sophisticated procedures such as creating a 3D rendering model.
One party can place an order for a certain amount of power and suggest a price; hardware owners can review the details and “rent” their hardware for a certain period of time. The platform will automatically calculate how much power was given; translate that into the platform’s dedicate coin; bill the customer once their request was performed and transfer the payment to the executor. All these transactions happen automatically and are backed by a smart contract.
Over 70% of independent workers have had troubles with receiving their hard-earned payment at least once during their career. With little-to-no legal means, chasing the non-payers remains a huge struggle for freelancers. Late payments are also all so common with some freelancers being forced to wait for over 98 days for their paycheck to arrive.
Freelance online marketplaces mediate the payment relationships to some extent for a fee, yet professionals who chose to set up direct contracts with the clients remain vulnerable. Putting those contracts on the blockchain can result in multiple benefits such as:
- Freelancers will get paid on time once all the pre-agreed conditions are met. Smart contracts can reduce the scope creep and help freelancers collect their payments automatically in a timely fashion. Contracts these ways become nearly impossible to compromise or breach.
- Reduced transaction fees. Freelancers working with international clients know that bank fees for cross-border payments can be an absolute deal-breaker. According to the World Trade Bank, transaction fees for money transfers average around 45% globally, and freelancers based in developing countries are often forced to pay even higher rates. A drop of just 5% could result in $16 million in additional income for all the recipients. Blockchain can ensure just that.
Moonlighting is the first freelance platform planning to put some of their transactions on the blockchain. Specifically, they plan to offer lower processing fees for payments made through the platform; offer more competitive currency exchange rates and in general, create a more secure and transparent environment for freelancers.
Securing a good apartment or an office space in the in-demand area can be a real hassle. As a possible tenant, you are required to submit all sort of paperwork to “impress” the property owner. At the same time, you have to do your own due diligence and ensure that you are not signing a shady deal.
Blockchain can be leveraged to streamline this process for both parties. A recent Deloitte report suggests the following operational model:
- Both lessor and lessee list their requirements on a multiple-listing service. This transparent blockchain-based platform enables all parties to refine the listings based on their requirements.
- After the property inspections, the parties sign the letter of intent and begin the pre-lease due diligence. Here blockchain-based digital IDs could be used to conduct background checks on both parties.
- Afterward, the key terms of the lease agreement are recorded on the blockchain and become a smart contract. This contract automatically indicates the payment of a securing deposit/advance rate using a respective payment method (cryptocurrency wallet or bank account). Once this condition is met, the lessor automatically transfers the possession of the property to the other party.
- Further on, the smart contract could also initiate regular rent payments. When the lease term expires, the smart contract will automatically initiate the transfer of the security deposit back to the lessor.
Ultimately, smart contracts have a wider potential to transform a wider range of industries and transactions – P2P and B2B – and create a more secure and efficient ecosystem of exchanges.
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