Blockchain 4 Business?-?Pillar 4: Smart Contracts.

Now that we Grasped Blockchain Fundamentals through my first 2 Posts, it’s time to stop a moment and dig deeper on the last paragraph of my last post:

“What Makes a Blockchain the Next Big Thing for Business ?”

As mentioned, to further understand how a blockchain for business works, and to appreciate its potential for revolutionising business networks, you need to understand the four key concepts, or pillars, of blockchain for business:

1) Shared Ledger, 2) Consensus, 3) Permissions, 4) Smart Contracts.

This post focuses on the Smart Contracts.

A smart contract is an agreement or set of rules that govern a business transaction; it’s stored on the blockchain and is executed automatically as part of a transaction. Smart contracts may have many contractual clauses that could be made partially or fully self-executing, self-enforcing, or both. Their purpose is to provide security superior to traditional contract law while reducing the costs and delays associated with traditional contracts.

In other words,

Smart contracts help you exchange anything of value in a transparent, conflict-free way while avoiding the services of a middleman.

Ccompare them to a vending machine:

Ordinarily, you would go to a lawyer or a notary, pay them, and wait while you get the document. With smart contracts, you simply drop a bitcoin into the vending machine (i.e. ledger), and your escrow, driver’s license, or whatever drops into your account. More so, smart contracts not only define the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforce those obligations.

For example, a smart contract may define contractual conditions under which corporate bond transfer occurs or it may encapsulate the terms and conditions of travel insurance, which may be executed automatically when, for example, a flight is delayed by more than six hours.

Smart Contracts have important characteristics making them an advanced and groundbreaking innovation:

Autonomy — You’re the one making the agreement; there’s no need to rely on a broker, lawyer or other intermediaries to confirm. Incidentally, this also knocks out the danger of manipulation by a third party, since execution is managed automatically by the network, rather than by one or more, possibly biased, individuals who may err.

Trust — Your documents are encrypted on a shared ledger. There’s no way that someone can say they lost it.

Backup — Imagine if your bank lost your savings account. On the blockchain, each and every one of your friends has your back. Your documents are duplicated many times over.

Safety — Cryptography, the encryption of websites, keeps your documents safe. There is no hacking. In fact, it would take an abnormally smart hacker to crack the code and infiltrate.

Speed — You’d ordinarily have to spend chunks of time and paperwork to manually process documents. Smart contracts use software code to automate tasks, thereby shaving hours off a range of business processes.

Savings — Smart contracts save you money since they knock out the presence of an intermediary. You would, for instance, have to pay a notary to witness your transaction.

Accuracy — Automated contracts are not only faster and cheaper but also avoid the errors that come from manually filling out heaps of forms.

Here is the code for a basic smart contract that was written on the Ethereum blockchain. Contracts can be encoded on any blockchain, but Ethereum is mostly used since it gives unlimited processing capability.

An example smart contract on Ethereum. 

Source: https://www.ethereum.org/token

The contract stipulates that the creator of the contract be given 10,000 BTCS (i.e. bitcoins); it allows anyone with enough balance to distribute these BTCs to others.

Smart contracts are far from perfect. What if bugs get in the code? Or how should governments regulate such contracts? Or, how would governments tax these smart contract transactions? As a case in point, remember my rental situation? 

What happens if I send the wrong code, or, as lawyer Bill Marino points out, I send the right code, but my apartment is condemned (i.e., taken for public use without my consent) before the rental date arrives? If this were the traditional contract, I could rescind it in court, but the blockchain is a different situation. The contract performs, no matter what. The list of challenges goes on and on. Experts are trying to unravel them, but these critical issues do dissuade potential adopters from signing on.

Part of the future of smart contracts lies in entangling these issues. In Cornell Tech,for instance, lawyers, who insist that smart contracts will enter our everyday life, have dedicated themselves to researching these concerns.

Actually, when it comes to smart contracts, we’re stepping into a sci-fi screen. The IT resource center, Search Compliance suggests that smart contracts may impact changes in certain industries, such as law. In that case, lawyers will transfer from writing traditional contracts to producing standardized smart contract templates, similar to the standardized traditional contracts that you’ll find on LegalZoom. Other industries such as merchant acquirers, credit companies, and accountants may also employ smart contracts for tasks, such as real-time auditing and risk assessments. Actually, the website Blockchain Technologies sees smart contracts merging into a hybrid of paper and digital content where contracts are verified via blockchain and substantiated by physical copy.

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