The contracting process has been evolving significantly over the last few years; think about how you sign a contract to change your mobile phone company now and how you did it a few years ago. Many companies are still signing physical contracts, but others are turning to Smart Contracts and other digital contracting trends that dramatically change how business-to-business agreements are entered into. Here we tell you what a Smart Contract is, how it works, cases in which it can be used and other trends in digital contracting.
What is a Smart Contract?
Smart contracts are self-executing contracts with the contract terms between buyer and seller directly written into lines of code.
How does a Smart Contract work?
The content of a Smart Contract is a code stored in a Blockchain. The code is based on logical rules, e.g. if X) happens, then Y will do. Therefore, several conditions are established, the fulfilment has to be verified by a computer-based instrument.
To better understand how a Smart Contract works, here are some examples:
- Smart contracts in the insurance sector. When you buy a car, you take out comprehensive insurance from your car insurance company. This insurance covers damage to the car even in the event of adverse weather conditions. A few months after the car was purchased, hail falls and damages the car. When you look at your bank account the same day, you have already been paid by the insurance company to cover the damage.
In other words, the fulfilment of the contract is not going to rely on third parties. For example, a judge or an expert assesses the damage and its value, but once the condition for compensation has been met, it is automatically paid.
- Smart contract in banking. Banking is potentially another primary target for the Smart Contract. For example, a person may request a loan from the bank, sign the contract and then start to pay every month, and after two months, they no longer pay. With Smart Contract, it would be possible to deny access to your accounts until the payment is made.
- Smart contract in online sales. The smart contract in such a case would only allow the payment of the money to the seller once he has received the product.
- Smart contract in the tourism sector. Smart contracts in the tourism sector are used in a myriad of applications. For example, imagine someone buying a flight ticket and taking out insurance to cover a delay. Under a Smart Contract, compensation for the delay could be paid automatically, without going through many formalities with the airline to get compensation.
Trend-setting tools in digital contracting
Digital contracting is not just about scanning a contract and emailing it to the other party, but as we have seen, it can go far beyond that and streamline the whole contracting process used by any business. Some of the tools that are setting trends in digital contracting include:
- Cloud storage. Contracts are no longer stored in several locations but are stored in the cloud so that they are accessible any time, anywhere and can be used to work together collectively.
- Using electronic signatures. Electronic signatures are a further step in the digital transformation of companies, allowing them to streamline procedures and increase productivity with this digital tool. The electronic signature is, therefore, a further element of the Smart Contract.
- Selling with Apps. Not only are Apps used for information and communication, but they are also becoming an additional sales channel.
- Biometrics. Digitally identification of the parties signing an electronic contract is essential to guarantee the validity of the contract. In this sense, biometric identification has become a trend because it allows the identification of individuals by unequivocal features such as voice, fingerprint, iris or the shape of the face.
As you have seen, electronic signatures and Smart Contracts are technologies going hand in hand and achieving a legal framework that is entirely secure for transactions between companies and individuals, saving time, money, paperwork and improving companies’ efficiency, productivity and profits.