Smart Contracts?: ?Separating the Hype from?Reality
The common adage about smart contracts has been that they are neither smart nor contracts. That thinking is changing. More than two decades after the term was first coined by Nick Szabo, an early blockchain proponent, smart contracts are finally being seen as a game-changer for many industries.
Szabo defined a smart contract as a “computerized transaction protocol that executes the terms of a contract.” Today, the term refers to computer code hosted on a blockchain that executes, given certain criteria.
Insurance is an example of an industry that would benefit from using smart contracts. If the data related to insurance claims was stored on a blockchain, then a claim could be processed automatically by multiple parties. BCG estimates that a broad adoption of blockchain and smart contracts in the property and casualty segment could generate about $200 billion in margin.
Not All Blockchains Are Suitable for Smart Contracts
Although blockchain technology enables smart contracts, not all blockchain platforms are suitable for them. Looking at a simplified grouping of blockchain platforms shows why.
- A Pure Transfer of Value — Projects such as the Ripple Transaction Protocol are intended solely for the transfer of digital currency. These blockchains cannot be used to conduct smart contracts.
- Simple Scripting Chains — Bitcoin, the first widely adopted use case of blockchain, allows for some rudimentary scripting. However, Bitcoin’s scripting language is not Turing complete, which makes it less suitable for smart contracts.
- Smart Contract Platforms — Projects such as Ethereum support Turing-complete scripting and can be used to create smart contracts. Examples of other platforms in this group include Corda, Hyperledger, Cardano, and EOS.
Projects such as Ethereum, Corda, and Hyperledger support scripting that is Turing complete and that allows for full expressiveness, making them suitable for smart contracts. These projects are also a mix of public and private blockchain platforms. The exhibit below shows the relative popularity and longevity of these platforms.
What Are Some Potential Use Cases?
Numerous industries are exploring the use of blockchain via pilots, proofs of concept, and deployments. Here are a few interesting use cases.
- Tracking of Goods. Product tracking has been a focus of several blockchain efforts, including that of one by Walmart. The company used blockchain-connected devices to track the transporting of a mango from a farm in Mexico through the supply chain. Walmart then made this information available to the end customer. The company found that what would have taken 6 days to track previously was possible to do in just two seconds.
- Real Estate Titling. Real estate ownership is a system that is heavily paper-based. Several entrepreneurs are trying to introduce blockchain technology into the titling process. This could simplify overhead costs and enable new use cases, such as fractional ownership.
- Security Tokens. Enforcing security laws is a manual process for regulatory bodies such as the US Securities and Exchange Commission. If US companies held their shares on a blockchain, it would be possible to automatically deal with security violations. This would make the process more transparent and reduce the cost to taxpayers.
How Will Regulation Shape the Future of Smart Contracts?
Some companies have been hesitant to incorporate smart contracts owing to the evolving regulatory landscape. For example, until recently, it was unclear whether Ethereum could be considered a security. This is because Ethereum was initially launched via an initial coin offering (ICO) — a crowdfunding mechanism. It looks like Ethereum is now in the clear, but the uncertainty may have held back adoption.
It’s important to note that while ICOs are a type of smart contract, not all smart contracts are ICOs. Regulators have been criticized extensively about the lack of oversight of ICOs, which has led to investors being misled and in some cases, taken advantage of.
Regulation for smart contracts is developing, and a clear framework could help propel the technology forwards. The state of Tennessee recently signed into law a bill that recognizes smart contracts as legal contracts. Such recognition on a national level in the US and in other countries could lead to more adoption and innovation.
How to Know if Smart Contracts Can Help Your Company
Determining whether smart contracts are right for your company requires considering several criteria. And as you do, it is important to understand both the potential for and limitations of the technology; grasping only one aspect will lead to either blind optimism or irrational pessimism.
One criterion to consider is how extensively your company shares the data it uses. Does it share data with numerous other entities? If so, blockchain could be a good fit. A distributed ledger could simplify communications while preserving privacy and security.
Scalability is another criterion. What type of scalability does your use case require? How many transactions per second are needed? Scalability is receiving a lot of attention among blockchain frameworks, because it's the main reason that companies cite for not adopting a blockchain solution.
Keep in mind that smart contracts and blockchain are not suitable for every use case. Shane Hampton of Hydrogen, a blockchain identity company, said,
“We have to accept that not every piece of economic activity that happens in the world is going to be replicated in a decentralized application.”
Smart contracts may not be for everyone, but companies should certainly pay attention to the potential they bring.
Palestrante na área de tecnologia
5 年Ana Paula Bernardi da Silva
Team Lead Performance Marketing | digital wizard; currently helping brands building their customer journeys and setting up successful conversion funnels | Certified OKR-Master | 7+ years CRM experienced
6 年Like mostly, the product is often not as far as its hype, however, it opens up technologies for other industries. Smart Contracts is a result of the Blockchain, which is a result of the implementation of Cryptocurrency etc. New technologies evolve
Youtuber at YouTube
6 年https://link4win.com/FreeBitcoin
Ex-TRM Labs. Community builder. Relationship builder. Constant learner. Cash-to-crypto expert. Mentor and advocate. MSc FCCI, BA, Postgrad Dip., TRM-ACI, CFCS
6 年Great explanation of smart contracts and their use cases.
(Retired) Web Developer, Published Tech Author, Webmaster
6 年A great read: thanks for sharing! Smart contracts are indeed on the leading edge of huge technical revolution. There's a huge distributed ledger technology tsunami wave heading our way - it's a good one. While smart contracts hold much promise - there are those nasty core problems that need to be resolved. Right now, three areas especially are slowing down the rate at which smart contract technology is being considered, accepted, and getting implemented: - Smart contract security. Thought the weaknesses in those 34,000 "vulnerable" smart contracts https://www.technologyreview.com/s/610392/ethereums-smart-contracts-are-full-of-holes/ should get resolved sooner rather than later. If we're honest, there's probably a lot more than 34,000 that need fixing. - Blockchain speeds. Blockchain execution speed too needs to be much faster. Hopefully, full roll-out of Ethereum sharding might go a long way to solving that issue later this year. Or something else, that is better, faster, more secure, with IOTA-like characteristics, may take its place. - Insecure web infrastructures. Without addressing the security weaknesses inherent in web infrastructures, when those cryptocurrency exchanges keep getting hacked (are some even intentionally hacked?), are we surprised that at first glance, people think that the problem is with the smart contract, even if that was secured? In addition, perhaps many current smart contracts aren't yet that smart. How so: if we need to resort to the court rooms around the world to resolve smart contract-related disputes, then the smart contracts at the centre of such disagreements haven't worked have they? A smart contract is only smart if it can truly work every time, without fail, from end to end. Of course, distributed ledge technology is still a young industry. All such problems suggest above can and will be fixed, in time. Though to really nail down the hardest, most elusive, and most damaging weaknesses, our industry might need the help of A.I. this year or next year at the latest, not in 5 years. Why: people naturally tend to repeat established patterns in programming, and some of those patterns are the problem, creating room for more damaging headlines. The web especially is a big tangle of spaghetti: A.I. working with humans together may offer the only practical way of untangling the tech mess we have created. Good times ahead later, though we can expect much disruption first, and probably the death of at least 80% of the 2017 crop of ICOs disappearing within 3 years.