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Executive’s Guide: Smart Contracts on Blockchain

Blockchain is one of the most important emerging technologies of the waning decade, with many experts believing it will change the world as we know it in the next 20 years. Arguably, the most important part of the blockchain is the smart contract. But don’t take our word for it – check out Deloitte’s CFO Insights to see the big picture:

  • Smart contract venture capital-related deals totaled $116 million in Q1 of 2016, more than twice as much as the prior three-quarters combined and accounting for 86 percent of total blockchain venture funding;
  • An Ethereum-based organization has raised more than $150 million to experiment with and develop smart contract-driven applications;
  • The Australian Securities Exchange is developing a blockchain-based post-trade solution to replace its current system;
  • The Post-Trade Distributed Ledger Group, an organization launched to explore post-trade applications on the blockchain, has 37 financial institutions as members;
  • Five global banks are building proof-of-concept systems with a trade finance and supply chain platform that uses smart contracts.

Ethereum Network

 

History of appearance – how smart contracts came to be

Let’s start with the basics – what blockchain is and how smart contracts relate to it. A blockchain is a growing list of records (also called blocks) which are linked using cryptography.  Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a blockchain is resistant to data manipulation and modification. It is an open, distributed ledger that can record transactions between two parties efficiently and securely. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the participating majority. Completing transactions does not require intermediaries or third parties, therefore it saves your time and resources.

 

Many people are still confused as to the nature of a smart contract and how they fit with the concept of blockchain. A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Basically, it’s a digitized set of terms that allows participants to achieve an agreement without involving any intermediaries. In the case of dispute, there’s no need to pay a fee to a bank or a lawyer. The terms of a smart contract are written in computer code, so it can’t be misinterpreted. The Ethereum smart contract concept allows you to create your own smart contracts that better suit the needs of your business. Here’s a quick example of smart contract application in insurance.

Smart Contracts In Insurance

Nick Szabo, a legal scholar by day and cryptographer by night, realized that the decentralized ledger could be used for smart contracts way back in 1994. The concept has since evolved, with Ethereum Foundation stating that a smart contract is not necessarily related to the classic understanding of a contract, but can be any kind of computer program. Ethereum was the first project which drew public attention to smart contracts implementation. It was made possible due to the design of a blockchain infrastructure.

Which smart contract examples are most business-mature?

Ethereum, Hyperledger Fabric, or NEM? This question is not necessarily on your business agenda today – but it will be tomorrow and for years to come. In a world that’s growing more decentralized every day, recognizing the best technology fit for the lowest cost is business-savvy. Depending on your goals and use cases, these are the top choices you can look at in the smart contract domain.

 

Hyperledger

Hyperledger Fabric smart contract example can also be referred to as ‘chaincode’. What’s great about Hyperledger is that it’s an enterprise-grade blockchain built with great flexibility. This makes it a perfect choice for enterprises as the business conditions change. Written on Go language, Hyperledger boasts efficiency with a fast compile time.

 

NEM

With good security, easy updates, and fluid execution, NEM’s decentralized application provides ultra scalable solutions. This smart contract example has high security and availability, so entrepreneurs can deal with business problems instead of lags in adoption and technical difficulties.

 

Ethereum

Ethereum smart contract is a safe bet, standing out as the most recognizable with the biggest capitalization out there. The majority of its token sales happen on the native Ethereum platform. These contracts provide a decentralized way to verify and enforce them, making it incredibly difficult to forge or censor.

Distributed Application VS Centralized Application

As of today, 80% of the functioning blockchain projects run on the Ethereum protocol, with a reported 94 out of the top 100 blockchain projects launched on top of the Ethereum network. As of August 2018, the market cap stands at $30.5 billion, and that doesn’t even scratch the surface of the value it represents for countless developers and blockchain startups. Ethereum facilitated the most ICOs by far compared to other related technologies and it had at least 35,000 developers working on it globally as of October 2017.

 

What’s the actual cost of smart contract development?

Let’s get this out of the way first – the smart contract development process, proper auditing, and testing are quite expensive. This is a high risk/high reward situation, just like any other business out there. Why are companies keen to experiment with smart contracts? The main reason would be to find opportunities in their business model. Being an early adopter opens up avenues to a multi-billion market. Moreover, it gives a company lots of advantages like new customers, media awareness, and more revenue.

 

A simple smart contract with no complex business logic costs around $7,000. More advanced contracts can cost you around $50,000 depending on the development challenges. It’s not uncommon that smart contract developers with domain expertise charge up to $100,000. There’s always a simple trade-off – the complexity of your contract defines the price.

 

Smart contracts in the real world – applications and implications

Smart contract as means of regulatory compliance

This is the most widely adopted use case that comes to mind in both Fintech and Banking. Swiss banking giant UBS uses Ethereum smart contracts to improve the quality of counterparty reference data through anonymous reconciliation.

 

Only the anonymous hashed data is submitted to an Ethereum private blockchain powered by Microsoft Azure. The Ethereum smart contracts then reconcile the data against the consensus and provide each participant the ability to search and view their own data in real-time. Users can instantly verify their data, or find where some of the anomalies come from.

 

Smart contracts can be coded to authorize transactions which comply with regulatory reporting. One of the regular use cases for banks is reporting automation to regulatory agencies. For example, every single time US banks authorize a transaction of more than $10,000, they must report the information to FinCEN for inclusion into the anti-money laundering database. Instead of filing countless reports, the process could be optimized for maximum efficiency with blockchain and smart contracts.

 

Smart contracts in supply chain and trade finance

Blockchains makes supply chain and trade finance documentation more efficient by streamlining processes previously spread across multiple parties and databases on a single shared ledger. Modern supply chains are still over-reliant on paper-based systems, which subsequently results in transactions taking weeks to commence.

 

Even modern electronic documents are easy to forge. Blockchain, on the other hand, provides secure digital copies to all parties in a transaction, and smart contracts can be used to manage the workflow and automatically transfer payments upon approval.

 

The current paper systems are estimated to drive $18 trillion in transactions per year. The opportunity to decrease costs and improve reliability in such a lucrative market is there for the taking. Startup backers in this area include three major VC funds as well as Barclays.

Blockchain Capabilities

Smart contract as decentralized storage of data

Accumulated data used for research increases exponentially, so ensuring information quality and preventing data manipulation has emerged as an important factor. An audit conducted by the National Cancer Institute found an incidence of fraud in 0.25% of the trials conducted. For research of such gravity, even a minor percentage like that jeopardizes the validity of all findings. To avoid fraud, data provenance has to be maintained.

 

Researches from the University of Texas At Dallas created DataProv – a tool that helps combat research fraud. Based on Ethereum, the system combines the immutable nature of the blockchain technology with cryptographic techniques to securely track data provenance without leaking sensitive information.

What are the benefits for business?

At the end of the day, smart contracts are very similar to traditional ones in purpose. Just like with any technology that replaced traditional tools over time, the main reason for adopting them is augmentation. By deploying smart contracts, you automatically gain:

Trust. Your documents are encrypted.  There’s no way to alter or mishandle them.

Backup. On the blockchain, each and every data block is immutable and instantly verifiable. Your documents are duplicated many times over.

Safety. Encryption keeps your documents safe, there is no way of hacking it. It would take an uncommonly large and smart group of hackers with considerable resources to just try.

Speed. Paperwork is slow, and manual document processing is prone to error. Smart contracts use software code to automate tasks, thereby reducing hours of work to minutes.

Savings. Smart contracts save you money by cutting out the 3rd party, reducing operational risks, and automating workflows.

 

Smart contracts have near limitless potential in the business world. They democratize the usually complicated processes in a way that they no longer become exclusive systems. Employing smart contracts allows your business to enjoy security benefits, reduction of costs, improved speed, and scalability.

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