Smart Contracts: What AR Professionals Need to Know
Table of Contents
- What is a smart contract (vs. blockchain)
- What are the four major parts of a smart contract?
- Types of smart contracts used on the enterprise blockchain
- Upgrade your AR operations with enterprise blockchain
Key takeaways
- A smart contract is a way to automate agreements on the blockchain securely.
- Smart contracts are often used in finance to improve efficiency, security, and transparency.
- You don’t need to use cryptocurrency to use smart contracts.
The enterprise blockchain industry has continued to mature over the past few years, and its business value is set to reach $3.1 trillion by 2030. For many in the decentralized finance (DeFi) space, a significant advantage of blockchain technology lies in smart contracts.
The smart contract has enabled accounting professionals to work nimbly, securely, and efficiently. Its automation capabilities and inability to be tampered with lend itself to compliance and risk management.
In this article, we’ll delve into everything you need to know about smart contracts today.
What is a Smart Contract (vs. Blockchain)
A smart contract is an agreement that executes specific actions when predefined conditions are met. Once a transaction is completed, it is permanently logged into the program and cannot be edited or removed.
Smart contracts are not a de facto part of blockchain technology but are built on it. The blockchain is what makes smart contracts irreversible and transparent, as opposed to other programmed agreements.
Because the entire contract is automated, they are fast, accurate, and immutable—making them ideal for payment transactions.
Is Bitcoin a Smart Contract?
No, Bitcoin, also written as BTC, is not a smart contract. Bitcoin is a digital currency, while smart contracts are a type of agreement. Using Bitcoin in a smart contract is possible, as both were developed on the blockchain.
Which Crypto Uses Smart Contracts
Many cryptocurrencies, including Bitcoin, Ethereum, EOS, Solana, Tezos, Polkadot, and Cardano, use smart contracts.
It’s also important to note that you don’t necessarily need crypto to execute a smart contract. Private or hybrid blockchains can use regular currency to execute transactions. What matters with a smart contract is that all predefined conditions are met.
What are the 4 Major Parts of a Smart Contract?
Designing a smart contract is fairly simple. There are four primary components you’ll need to get started:
- List the participants: Every contract has multiple parties, whether a person, system or even another contractor. For this purpose, let’s consider an invoice between a manufacturing company and a supplier. Both parties will be listed in the smart contract.
- Define the contract’s rules: The predefined rules make smart contracts run smoothly. The conditions dictate when the smart contract executes the next step in the process. For example, a manufacturer might have a smart contract that requires new supplies to be logged before payment is released to a supplier.
- Determine the contract’s actions: Next are the actions or functions of the contract itself. These actions are triggered when a condition is met. For example, the supplier is paid in full if the manufacturer logs supplies on time. However, the supplier may only receive a partial payment if there are damaged or late deliveries.
- Review the state of the contract: Finally, the status of the contract is presented. The status is simple: what step the contract is in—is a step pending, completed, or late, for example. This aspect helps participants to keep track of the current transaction.
Types of Smart Contracts Used on the Enterprise Blockchain
Application Logic Contracts
An application logic contract (ALC) is a smart contract often used in decentralized finance applications. These applications typically sync other blockchain contracts or integrations. The key difference is that these contracts pave seamless integrations between software or machines, not people or organizations.
For example, a company may use a blockchain-powered accounting system that uses an ALC to sync with its bank account.
Legal Smart Contracts
Due to their transparency and immutability, smart contracts are often used for legal agreements. Since they are built around strict but simple rules, they can also be helpful for business transactions.
However, due to this lack of flexibility and simplicity, legal smart contracts typically do not replace more complex agreements. Instead, they tend to be part of a binding legal contract, often called a hybrid contract. In this scenario, the smart contract verifies or triggers specific actions within a larger, off-chain transaction.
Decentralized Autonomous Organization Contracts
A decentralized autonomous organization (DAO) is not a smart contract but a management structure. However, it relies heavily on smart contracts to function.
Essentially, every voting power has a set number of tokens on the blockchain, and a proposal is set up as a smart contract. To vote on a proposal, each person submits a token. When a set number of tokens is reached, the proposal passes, and if it fails, the smart contract isn’t executed.
Upgrade Your AR Operations with Enterprise Blockchain
Smart contracts are a cutting-edge solution for B2B accounts receivable professionals looking to streamline their processes securely. We know this because Paystand’s Enterprise Blcockhian was the first to bridge traditional fintech rails and blockchain in 2014.
Since then, our network has had over $10 billion worth of transactions. Our notarized certificates allow businesses to instantly provide auditable payment receipts through the blockchain, thus building trust, reducing errors, and adding transparency to a previously siloed system.
To discover how smart contracts and blockchain technology can benefit your business, check out our in-depth dive into Paystand’s approach to enterprise blockchain accounting.
