Blockchain and the potential to help notoriously difficult industries
Whether you’re starting a new job or buying a new phone, contracts are integral to any official agreement. The sheer volume and complexity of traditional contracts can be overwhelming, involving high administrative costs, dependence on a third party system and often outright confusion. As processes are increasingly digitalised, it’s become necessary to find a way to make reliable, digital business agreements. Enter the smart contract, a computerised protocol which stores and carries out contractual clauses via blockchain. The point is to avoid relying on third party systems, and allow visibility and access for all relevant parties. But what exactly can they be used for?
Due to a lack of automated administration, it can take months for an insurance claim to be processed and paid. This is as problematic for insurance companies as it is for their customers, leading to admin costs, gluts, and inefficiency. Smart contracts can simplify and streamline the process by automatically triggering a claim when certain events occur. For example, if you lived in an area that was hit by a natural disaster and your house sustained damage, the smart contract would recognise this and begin the claim. Specific details (such as the extent of damage) could be recorded on the blockchain in order to determine the exact amount of compensation. The same series of events would happen following a car accident, or if somebody reported an insured personal device as stolen.
2. Supply chain management
Supply chain management involves the flow of goods from raw material to finished product. Smart contracts can record ownership rights as items move through the supply chain, confirming who is responsible for the product at any given time. This has become far easier using Internet of Things sensors, which track goods from producers to warehouses, from warehouses to manufacturers, and from manufacturers to suppliers. The finished product can be verified at each stage of the delivery process until it reaches the customer. If an item is delayed or lost, the smart contract can be consulted to find out exactly where it should be. If any stakeholder fails to meet the terms of the contract, for instance if a supplier did not send a shipment on time, it would be clear for every party to see. Making supply chains more transparent via smart contracts is helping to smooth out the movement of goods and restore trust in trade.
3. Mortgage loans
The mortgage process is far from simple. The terms of a mortgage agreement, for example, are based on an assessment of the mortgagee’s income, outgoings, credit score and other circumstances. The need to carry out these checks, often through third parties, can make the process lengthy and complicated for both the lender and the mortgagee. Cut out the middle men, however, and parties could deal directly with each other (as well as access all the relevant details in one location). As a general rule, the simpler something is, the cheaper it will be – and through smart contracts, US lenders alone could reportedly save a minimum of $1.5bn.
4. Employment contracts
The relationship between an employee and their employer can be tempestuous, especially if either party fails to meet expectations. By entering into a smart contract, an employee would know exactly what was expected of them, as would the employer. Recording interactions in this way could help to improve fairness in wages or conditions, as any changes to contracts would be recorded. This openness could greatly improve the relationship between employers and their employees. Smart contracts could additionally be used to facilitate wage payments, according to the agreed amount and within a specific time period. Smart contracts could also help to regulate the use of temporary labour, which involves an employer, an agency and a worker. The worker joins the agency and is then hired by an employer. Unfortunately, a lack of transparency has meant that agencies can alter the contract’s terms after workers have already started the job. This could mean shortening or lengthening the contract, changing wage rates or other worker’s rights. It can be difficult for the authorities to detect these changes, but not if a smart contract system is applied.
5. Protecting copyrighted content
Every time that a piece of content is used for commercial purposes, for example a song, the owner of the rights to that song receives a royalty fee in theory. Of course, there are multiple parties involved in creating a song, and it can be hard to work out who owns these rights and who is therefore entitled to payment, plus existing systems do not work well. This has led to confusion over entitlement, no doubt giving some contributors more than they are due to the detriment of others while some receive nothing at all. Smart contracts can ensure that royalties go to the intended recipients by recording ownership rights in a decentralised blockchain system. This could theoretically be applied to any piece of content with a team of contributors.
Smart contracts have many benefits for a wide range of industries, reducing unnecessary costs and time expenditure while enhancing transparency. In theory, they are more efficient and trustworthy than traditional contract law, and are also thought to offer better security as all actions are recorded and verified. However, like paper contracts, they could still experience fraud. Code is not infallible and can be delayed, intercepted and corrupted. As businesses move forward into digital negotiations, an awareness of these risks is integral.