Smart Contracts – Transforming Your Business
Blockchain Facilitating New Ways of Working
Thanks to digital disruption, the world of business has undergone a complete transformation. It’s becoming less of necessity for contracted parties to meet face to face, as a wide variety of work can be arranged digitally – if not actually carried out online. New tools have been put in place to support evolving business models, such as team messaging app Slack. In fact, it’s never been easier to set up reliable, digital business agreements. Instead of existing in a written, physical form, self-executing contracts can be stored via blockchain. These ‘smart contracts’ existed before blockchain, but the financial technology has made them more viable by digitalising assets. The term was first coined in 1994 by computer scientist Nick Szabo when discussing the use of electronic commerce to carry out contract law between strangers over the Internet. But why is this important, and how is it changing digital business?
What’s the point of smart contracts?
In most transactions and agreements between companies, clients and co-workers, all interactions have to go through a central, third party system. Each party is dependent on the central system, and if it has vulnerabilities or malfunctions then the whole network is compromised. It can also be costly in both time and money to wait for the third party to process interactions. Smart contracts avoid these issues by storing, verifying and carrying out contractual rules using blockchain, which is decentralised by nature. This means that all parties can access and view contracts without needing a middle man, therefore reducing time and cost. The contract can’t be edited without all parties knowing about it, which improves transparency and trust. Although it’s very difficult to tamper with the software, it can be programmed to react to certain triggers, e.g., ‘if payment is received, ship product’.
Theoretically, smart contracts are more efficient and trustworthy than traditional contract law. Even so, they are still at risk of cyberattack. Last summer, the DAO (Distributed Anonymous Organisation) suffered a hack which stole $50 million in cryptocurrency. Whilst virtually all software is under threat in terms of cybersecurity, smart contracts still offer a preferable alternative to existing methods.
How disruptive are smart contracts?
Smart contracts have a wide potential user base. They could be set up between a business and its suppliers, a company and a client, or an employer and their workers. The most disruptive part about smart contracts is that they decentralise business negotiations, which could be applied to any industry, particularly when creative rights are in question. In the music or film industries, for instance, smart contracts would disrupt the way that revenue is shared between contributors by making ownership rights publicly accessible. Therefore, the appropriate amount of money would go to the right contributors. Eventually, smart contracts could be used for more than just financial exchanges, for instance in services or other legal agreements.
Smart contracts are about encouraging transparency and honesty, but it’s not good news for everyone. The biggest losers are the central systems which will become obsolete and unnecessary. In terms of traditional law, smart contracts are unlikely to fully replace written contracts – not quite yet, anyway. Legal professionals should consider how their practise might be impacted and come up with a strategy to navigate potential disruption.
Smart contracts are also an enabler for disruption in the employment market. The expanding gig economy means that more and more jobs can be arranged (if not actually carried out) online. Once a computer programme can enact contractual clauses, there will be even less of a need to have conversations at all, let alone physical ones.
Smart contracts may change the way that business agreements and transactions take place through decentralisation, removing the need for third parties and streamlining digital interactions. They could bring transparency to contracts made in any industry, as well as between clients, companies, customers and, particularly in the case of creative sectors, the wider consumer market – but is blockchain really ready for an influx of users? The success of the DAO prior to the 2016 hacking scandal is a point in favour. However, the sheer number of relatively small systems coupled with a lack of advanced data management tech suggests otherwise. Once data can be securely transmitted and a strong system (perhaps Ethereum) emerges, blockchain will be virtually unstoppable – and the days of centralised, third party systems could well be over.
Is your business dependent on a centralised, third party? Could you benefit from the use of smart contracts? Is blockchain technology ready for mass usership? Comment below with your thoughts and opinions.