Smart contract applications,

limitations & future outlook

Smart contract applications,
 limitations & future outlook

January 9, 2024

Smart contracts adoption by industries

While smart contracts have proven exceptionally useful in various industries, the BFSI segment receives the most benefits from smart contracts, followed by healthcare and logistics.

Scheme title: Global smart contracts market by industry
Data source: grandviewresearch.com — Smart Contracts Market Report

Financial services

With the mainstream adoption of cryptocurrencies like Bitcoin and Ethereum by both individual investors and financial institutions, including banks, blockchain technology and smart contracts work as a technological backbone for P2P transactions, automated claims processing, and various auditing processes.

Healthcare

Healthcare institutions are increasingly using smart contracts technology to address the complexities of sensitive medical data management. Healthcare organizations leverage smart contracts with built-in transparency and security to streamline patient data privacy management, clinical trials and research, as well as drug traceability.

Logistics & supply chain

Logistics and supply chain is the next biggest contender for smart contract adoption. Payment settlements, inventory management, order processing and tracking, regulatory compliance, dispute resolution, and origin verification are some of the many other areas where smart contracts can enhance visibility and enable automation.

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Top smart contract use cases & real-world examples

BFSI

Trade clearing & settlement

Trade clearing and settlement are notoriously resource-intensive yet one of the most vital processes in the finance system. Self-executing smart contracts can autonomously handle most paperwork and digital identity, KYC, and AML verification procedures. Their adoption can reduce operational costs, decrease settlement times, and make particular markets more liquid. All parties can see if there are any updates to the smart contract conditions, because any changes are immutably recorded on Ethereum or any other blockchain platform, providing a trusted historical record.

Insurance claims processing

Smart contracts can help insurance companies streamline lengthy claims management by automating claims validation and execution based on predefined conditions. When an insured event occurs, the smart contract can automatically assess the data from an on-chain source or Internet of Things-powered sensor and execute payouts, eliminating the need for mediators. Moreover, smart contracts substantially increase trust between parties in the insurance industry, as everyone can access a single source of truth on the blockchain network.

Decentralized finance (DeFI)

With the help of smart contracts and DeFi, organizations in the BFSI landscape can streamline lending, borrowing, trading, and asset management. DeFi can be used to create decentralized exchanges by enabling peer-to-peer exchange of assets and eliminating the need for an intermediary. DeFi solutions and decentralized applications can also automate portfolio management by rebalancing portfolios based on predefined rules.

Implementation barriers & potential solutions

Implementation barriers & potential solutions

Smart contracts are bug-prone

Smart contracts are still a relatively new technology that is yet to be fully explored and understood by the development community. Smart contract engineers are constantly discovering new bugs and coming up with best practices. Therefore, smart contract development calls for an unconventional development approach along with some definitive measures to minimize the risk of failure:

  • Have a plan for failure
    Especially if it's a non-trivial smart contract, developers have to be ready for bugs to slip through. Companies should have a clear protocol for pausing smart contracts to minimize the amount of automatic transfer of funds between parties.
  • Deploy in phases
    In general, it’s advised to approach smart contract rollout iteratively. Deploying phase by phase, gradually expanding the user base, and continuously testing before and after each deployment are all crucial measures for safe smart contract implementation.
  • Prioritize clarity over performance
    While most software development initiatives don’t tolerate any compromises, smart contracts are a definitive exception. So companies should ensure that the contract logic is as simple as possible, use ready-made code when applicable, and focus on clarity rather than performance. While it’s tempting to optimize code for performance, it will most likely increase its complexity, leading to more errors.

Smart contracts are susceptible to external data manipulation

Value-adding smart contracts often rely on oracles to execute terms. They connect blockchains to external systems, allowing smart contracts to execute terms using data from the real world. Therefore, in many cases, smart contract performance depends entirely on the quality and accuracy of external data. Here are some steps you can take to mitigate risks associated with external data manipulation:

  • Use multiple oracles
    Сross-check external data against multiple external data sources. Smart contracts can be programmed to execute terms only when data from multiple oracles matches.
  • Use fallback mechanisms
    Given that oracles are controlled by a third party, there can be unforeseen situations where external data becomes unavailable or unreliable. This is why companies should come up with a fallback mechanism. They can use historical data instead of real-time data or simply pause smart contract enforcement. In any case, involved parties should have a clearly defined plan for what should happen if the oracle is unavailable.

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AI & smart contracts

While AI holds immense potential for advancing smart contract performance, reliability, and development, there are currently two actionable use cases:

Engineers’ helping hand

The most widespread application of AI in smart contracts revolves around assisting engineers in creating, testing, and maintaining smart contracts. For example, Etherscan, one of the most popular tools for blockchain scanning for Ethereum, introduced a tool that uses AI to help users better interpret the terms of smart contracts. SettleMint, a low-code blockchain application developer, announced the integration of an AI assistant to help developers streamline smart contract development, data integration, and QA.

Smart contracts are a transformative force

Smart contracts and blockchain development are the next step in digitizing the business landscape. With entirely online partnerships already a standard, smart contracts play a pivotal role in making transactions more transparent and reliable for all parties involved. While it can take some time for organizations to restructure their processes around smart contracts, the expected long-term returns of using this technology seem to be unmatched by any other technology, especially in finance, insurance, real estate, and healthcare. If you want to outpace competitors in your industry by integrating smart contracts, consider turning to an experienced smart contract development vendor like Itransition.