As decentralized applications gain traction, the many ways in which they can be revolutionary continue to surface. Smart contracts, a foundational component of decentralized applications, are just beginning to make waves as the underlying benefits of the breakthrough technology could transform financial transactions globally.
According to S&P Global, “Smart contracts are business rules written as software code and deployed to multiple parties in a blockchain network.” Deploying a contract to multiple parties, opposed to using a centrally hosted database, has its inherent advantages and may prove to be a gamechanger in the business world.
For one, by giving all parties in a network their own copy of the database, there is increased transparency and authority over any changes that are made. In a centrally hosted database, the host could make changes without approval from the other party. Smart contracts create a more two-sided business agreement, bolstering the trust buyers and sellers have in one another.
“Increased efficiency, greater transparency, and reduced dependency on transaction counterparties can improve companies’ bottom lines and support overall enhanced creditworthiness,” said S&P Global Ratings analytical manager Vanessa Purwin.
Smart contracts also have the ability to accelerate business transactions with unprecedented efficiency. With the ability to code in advance, parties can come to an agreement without legal proceedings.
However, despite the clear benefits, the legal, regulatory and technological issues associated with smart contracts have left adoption rates stagnant.
“While smart contracts may disintermediate traditional transaction parties and the operational risks associated with their roles, they present technical complexities that pose their own distinct challenges to the smooth functioning of security issuances,” said Ashish Sinha, an associate director at S&P Global Ratings focusing on blockchain.
Contracts are pivotal in all business transactions, leaving little room for incorrect coding or bugs. Moreover, legal and regulatory uncertainties may make it difficult for criminals to be held accountable. Ultimately, the concerns associated with smart contracts have held them back from taking over the business world.
Recently, certain decentralized apps that utilize blockchains have been exposed in major attacks, forcing users and companies into a state of mistrust. Although the skepticisms surrounding smart contracts are evident, what may be even more concerning is the weaknesses yet to be found.
“The ultimate impact of smart contracts on creditworthiness will depend on how these concerns are addressed,” said Purwin.