Lesson 10: The benefits of automation with smart contracts

No intermediaries, no bureaucracy, no supervision, no major costs. And, above all, no misunderstandings. With certainty, transparency, speed and autonomy. Roughly speaking, these would be the advantages of a smart contract created and stored using blockchain technology. This digital agreement between two or more parties automates the activation and fulfillment of all the stipulated actions and clauses as the predetermined conditions are satisfied. 

Technically, these are lines of code embedded in computer protocols executed in a distributed way on a blockchain-based network. These types of protocols enable two or more parties to establish any kind of contract without the need for intermediaries, such as notaries or banks, and without having to meet in person. This helps to reduce costs significantly.

When the smart contract is generated, the blockchain validators verify the accuracy of the information, and the digital agreement is then recorded as part of a block. Smart contracts accept parameters through blockchain transactions (as input), process them according to a deterministic algorithm, and produce (as output) either a change of state in the contract's memory or a new blockchain transaction. Ethereum is generally used, although there are other platforms that offer smart contract services, like Cardano and Ripple.

The responsibility of ensuring that the contract's conditions are fulfilled is assigned to an external agent (such as a smartphone app). When the app sends the signal to the blockchain that one or more of the expected conditions have occurred, it automates the execution of the contract.

Smart contracts operate on the if/then principle, meaning that when a specified event outlined in the contract occurs, the computer protocols automatically validate the contract's terms, setting off the predetermined outcome. This self-execution—the assurance of the contract's automatic fulfillment when predefined conditions are met—is the defining characteristic of smart contracts.

This effectively eliminates the risk of incorrect, failed, or incomplete enforcement of the contract clauses and conditions, nullifying the human element or the chance that a party may choose not to honor the agreed-upon payments and/or terms.

• Real estate transactions.
• Works contracts.
• Currency exchange.
• Management of stock assets.
• Banker’s drafts to freeze the amount to be transferred and release it on a specific date.
• Financial transactions.
• Corporate transactions. Protection of intellectual property.

Smart contracts can also significantly enhance supply chain management: from more precise and transparent traceability of the goods and greater trust between suppliers and retailers to reducing fraud and theft throughout the chain.

Undoubtedly, the insurance industry is one of the most promising sectors that is already benefiting from smart contracts. Specifically, some travel insurance companies now offer parametric policies made available by certain airlines via the Ethereum platform. The contract includes information on flight departure times and, in case of a notified delay and in accordance with the conditions provided in the contract, automatically activates reimbursement directly to the user’s account, avoiding the entire bureaucratic process inherent in the claim for compensation.

In more general terms, the use of smart contracts in insurance could eliminate many of the errors and inefficiencies present in the current system: for example, in the case of life insurance, the blockchain allows rapid and precise verification of all data, determining the validity of the policy immediately after receiving the death certificate, with a progressive automation of processes such as compensation and reimbursements. The same mechanism, of course, is also applicable to claims for damages and accidents.

It is an objective fact that the insurance industry is undergoing an unprecedented digital transformation. Therefore, the processing of claims through blockchain technology and smart contracts— automating policy term execution and contract compliance — is gaining traction. For a start, it simplifies a procedure that for users is usually (and considered) cumbersome and slow. And with a benefit for insurance companies too: fraud detection and risk management.