Smart Contract in Private Blockchain: All You Need To Know

1. Introduction

Definition of Smart Contract

In technical terms, smart contracts are self-enforcing digital contracts stored on a blockchain, either a private or public network, that process agreements between two or more parties when the pre-determined terms and conditions are met.

As the definition explains, smart contracts typically automate the process of contract execution without any third-party or intermediary involvement.

Participants among which the agreement takes place are certain and aware of the outcome of the contract. Hence, smart contracts prevent time loss by speeding up the contract execution and enforcement procedures.

To put it briefly, self-executing virtual agreements are called smart contracts that ease the transfer of assets or properties. By automating the workflow, it decides the next course of action when the protocols are fulfilled by the participants.

Overview of Private Blockchains

A private blockchain is a permissioned blockchain network that is developed, maintained, and controlled by private entities for a secured and transparent exchange of information or transactions across the network.

It is a partially decentralized and peer-to-peer distributed network with a central point of authority and private control. The creators and administrators have control, whereas selected participants (say stakeholders, partners, or employees) have permissioned access to this private network.

Unlike a public blockchain which is a permissionless blockchain, no one can join or access a private blockchain without an invitation. Some of the prominent examples of private blockchain are Hyperledger, R3 Corda, Ethereum Enterprise, and Ripple.

Also Read: Introduction to Private Blockchain: A Beginner’s Guide

2. Benefits of Using Smart Contracts in Private Blockchains

With its technological prowess, smart contracts in private blockchains bring substantial benefits to the business and corporate sectors. By eliminating the need for intermediaries or controlling authorities to oversee, verify, and validate transactions, these virtual agreements obviate delays and reduce fees.

Here is a quick go-through of the exceptional advantages of integrating smart contracts.

Efficiency & Accuracy

Smart contracts are enforced and executed automatically with great speed and accuracy. Since everything is digitalized and automated,  much time gets saved that otherwise would have gone to dealing with paperwork.

Earlier, documentation of contracts was done manually by humans. This is the reason a lot of time was spent rectifying errors. But smart contracts leave no room for chances of committing errors.

Cost savings

As mentioned in the previous section, with smart contracts, you don’t need any third-party assistance to process transactions. This substantially reduces your associated fees.

Without any interference from intermediaries, the process of contract execution also gets streamlined, thus resulting in noteworthy time savings.

In addition to this, smart contracts promote autonomy as you no longer have to rely on an outsider or third party to validate and confirm the agreement. Eventually, you can prevent any kind of manipulation or influence.

Increased security

Another feature of smart contracts that holds paramount importance in a private blockchain is the security of transactions and information exchange. Smart contract developers leverage cryptography technology to keep information in digital contracts safe from infiltration for personal gain.

As a consequence, the records stored in the network are impossible to hack or tamper with because they are end-to-end encrypted. Each entry stored in the blockchain is linked to past and subsequent transactions, thus making the entire chain secure against alteration by any hacker.

Transparency

The above point brings us to the next advantage – improved trust and transparency. Since all records are end-to-end encrypted and there is no involvement of third parties, it builds trust among the network members.

They are no longer doubtful about the privacy of the transactions shared in the closed network. This decentralized and tamper-resistant nature of transactions ensures that editing, removing, or altering records for personal gain becomes an impossibility.

Backup

The fear of data loss is reduced to a great extent when transactions are executed using smart contracts in a blockchain. Records are digitally documented and duplicated every single time a new transaction is made.

Original data can be restored anytime on any other device by anyone having authorized access to the blockchain. In other words, it can be said that blockchain is the most reliable backup method because every node has a copy of the distributed ledger.

3. How Smart Contracts Work in Private Blockchains

Just like traditional agreements, smart contracts work on “if, when, then..” statements except for the fact everything is written in codes in a private blockchain. Earlier, terms and conditions in a contract were put in manually by humans, but now the scenario has completely changed for the better.

The next segment highlights the function and mechanism of smart contracts between parties.

How smart contracts are created and executed

Although smart contracts work in a similar manner as traditional contracts, the process of contract enforcement and execution is entirely automated.  While standard and conventional contracts are enforceable by law, it is the programming codes that enforce a smart contract.

Here is a step-by-step explanation of how smart contracts are created by blockchain development companies and how they work.

• Step 1: Business teams collaborate with developers to define criteria for desired smart contract behavior. They intricately outline the specific criteria that the smart contract should adhere to.
• Step 2: Simple and straightforward events like payment authorization, reaching a predefined threshold on a utility meter reading, or shipment receipt become conditions for the contracts.
• Step 3: Complex operations might be encoded through the integration of sophisticated and intricate logic., Some instances are valuing derivatives automating insurance payments, etc
• Step 4: In this step, developers use a smart contract writing platform, where they construct and thoroughly assess the logic underpinning the contract. Once it is done, the contract undergoes scrutiny by a separate team specializing in security testing.
• Step 5: Either an internal expert or a specialized company scrutinizes smart contract security to ensure that every potential vulnerability is addressed and mitigated.
• Step 6: Once authorization is completed, the contract is deployed on an existing private blockchain or any other distributed ledger infrastructure.
• Step 7: This step involves configuring the smart contract to listen for event updates from a cryptographically secure “oracle” data source after it is deployed.
• Step 8: As the smart contract is finally prepared, it starts receiving the required events or series of events from one or multiple Oracle sources. Thus, the smart contract executes seamlessly its programmed tasks with absolute accuracy.

Examples Of Smart Contract Use Cases In Private Blockchains

With the growing popularity and increase in the adoption of private blockchain platforms, enterprises and stakeholders realized that this distributed ledger technology could actually turn out to be a pathbreaker in accelerating their business processes.

Here we have put forward some of the noteworthy use cases where smart contracts applications are exemplary in the private blockchain arena.

Smart Contract in Finance

Traditional financial services such as trading funds, lending, borrowing, and a host of various other services are gradually being replaced by digital solutions. All thanks to the decentralized, immutable, and trustless attributes of blockchain.

Decentralized finance (DeFi) applications, also known as dApps, are integrated with smart contracts functionality that promotes transparency in financial transactions, reduces costs, and improves accessibility to financial services to people across the world.

Decentralized business models have already captured high value in the market collecting billions of dollars with their 24/7 functionality. With its remarkable characteristics, more and more users are seen participating in this new generation of decentralized finance services.

Although only a few years old, the finance sector has been favorably impacted by the smart-contract-enabled dApps, delivering great utility and value to the customers.

In fact, the private blockchain is disrupting the banking industry with its power to automate workflows, speed up transactions, facilitate quick cross-border payments, etc.

At this present time, as per the DappRadar Report, around 11,000 dApps are powered by smart contracts with an estimated figure of 1,52,000. Nearly 1.7 million dApps users engage with these apps on a regular basis where 28.5 million transactions are executed by them. This computes up to 6.6 billion dollars per day as the total incoming value.

Smart Contracts in Real Estate

Property rights management has become seamless with the introduction of smart contracts. Tokenization using smart contracts has advanced the process of creating, tracking, and assigning fractional ownership of assets.

Incorporating smart contracts and private blockchain automates the process of documentation and eases the transaction process. Furthermore, it lowers the barrier to entry of multiple investments as it merges blockchain with real estate transactions.

Property Buying And Selling Without Smart Contract

Property Buying And Selling With Smart Contract

There are a number of successful examples of the creation of digital tokens for real estate properties using smart contracts on blockchain networks such as SolidBlock and RealIT.

A recent example is the case of the Republic of Georgia, Caucasus Region. The country has been in the process of building a land title or property registration powered by blockchain technology since 2016.

Smart Contracts in the Corporate World

As per Senate Bill 69 passed by Delaware in 2017, businesses and large corporations can be managed by building blockchain-based Decentralized Autonomous Organizations (DAOs).

DAOs, with the use of smart contracts, can enable sophistication and control in their corporate structure by encoding business protocols and automatically enforcing incentive structures within the framework.

The significant advantages of DAO development in an organization are:

• Lower administrative costs in terms of less office space, less hiring, etc.
• Better and informed decision-making.
• Tasks automation with the use of smart contracts.
• Obviating the need for an intermediary or central point of authority.
• Reducing the chances of committing human errors.

Smart Contracts in Gaming

Despite the gaming industry being the most booming sector at present, its value is created and distributed inequitably within the industry. This hundred-billion-dollar gaming ecosystem continues to move with a one-directional money flow where players pay to play.

However, implementing blockchain technology and smart contracts in games can make it a two-way flow of income where players also get to earn by trading in-game assets. This is where Non-fungible tokens (NFTs) development comes into the picture.

Creation and tokenization of unique digital assets or collectibles become a part of the in-game content which players can exchange, buy, or sell. The process of NFT creation highly depends on smart contracts because the NFTs have to be rare, one-of-the-kind, and indivisible.

Blockchain in gaming underpins NFT development by seamlessly facilitating token ownership, immutability, interoperability, and provable scarcity. Together, these contribute toward an equitable value model for gaming, driving mainstream adoption.

Also Read: A Complete In-Depth Guide To Non-Fungible Tokens (NFTs)

7. The Bottom Line

Although a complex logic process, the potential of smart contracts goes beyond the simple property or asset transfer.  From legal proceedings to paying insurance premiums, and real-time auditing to risk assessment, its scope is ever-expanding.

Therefore, the true evolution will come from whole new paradigms that we have not yet imagined.  Today, the smart contract market is growing rapidly with great speed and innovation.

Building smart contracts makes it possible for us to experience the great progress underlying the symbiotic relationship between blockchain and fintech systems.

That’s all for today! Thanks for reading. Stay tuned for more informative articles on smart contracts, blockchain, DeFi, and more.