Why I Think Smart Contracts Are the Future of Business Deals
With cryptocurrencies making their way to the mainstream financial world, there’s an ongoing discussion about not only the emerging asset class itself, but about the technology associated with it too. “Blockchain” has nearly become a buzzword in the business world now and other technological benefits from the crypto world are becoming more apparent as well; mainly, smart contracts.
Originally coined by cryptographer Nick Szabo in the early 1990s, a “smart contract” is the enhanced version of a contract, mitigated by computers rather than a third party. Szabo saw contracts as a set of promises that were agreed to by a meeting of the minds, but could see that computers were the next step in improving them. Now, with the advent of blockchain technology, new contracts can be executed correctly and more efficiently than ever before. Keeping that in mind, I think it’s clear that smart contracts are the future of business deals, and I’m not alone.
According to research from Gartner, the firm estimates that by 2022, more than 25% of global organizations will utilize smart contracts. In addition, Market Research Future projects a compounded annual growth rate (CAGR) of 32% for the smart contracts industry, expecting the market for smart contracts to reach $300 million by the year 2023—here’s why.
Transactions, Now Decentralized
Of the many benefits that come from smart contracts, perhaps none is greater than the ability to decentralize the way we handle transactions. Smart contracts put computers and code in the place of a third party that would previously act as an intermediary. A simple analogy of this process used by Szabo was that of a vending machine. You put in a set amount of change and select the number of the good you’d like, then, when all sufficient conditions are met, the machine will dispense the good to you.
Smart contracts enable this vending machine-style of transaction to occur in much more complex ways. By utilizing smart contracts, we’re able to limit — or even completely cut out in some cases — a third party acting as an intermediary, meaning that we can limit fees associated with those parties as well.
In addition, all transactions are handled by a decentralized network, not a central authority. When using a decentralized network, it doesn’t matter where you’re sending money to or with whom you’re engaging. Instead, international transactions are able to be completed faster and easier than more traditional methods of payment processing. This is especially important for any businesses that process a lot of documentation and information, particularly in an increasingly global economy.
Supply Chain Management
Another benefit from smart contracts is in the supply chain management industry. We’re already seeing some companies become early adopters in this field like IBM, which released a blockchain-ready CPU earlier in the year smaller than a grain of salt, specifically designed for such tasks.
Since smart contracts operate on their own without the need for intermediary guidance, the new innovation can offer more efficient supply chains. According to SupplyChain247, smart contracts will enable the industry to form more agile supply chains that “automatically find, negotiate with and close deals with partners the world over.”
By leveraging the advantages of blockchain technology and smart contracts in supply chain management, suppliers, manufacturers, purchasers, and all other parties involved will be able to build stronger trust between each other, communicate more efficiently and openly, and track and validate production like never. IBM has outlined and gone even further in-depth on the uses of blockchain in supply chains.
Next up, we have automated payments that can be done by smart contracts. Remember the analogy of a vending machine? With smart contracts and blockchain, that analogy becomes possible for nearly every industry (not just a granola bar in the office break room).
Smart contracts can be used to establish automated payments that go out to vendors or others after appropriate conditions are met, meaning you won’t have to take time out of your own schedule to process payments. Along with that, smart contracts enable both parties to insure themselves against fraudulent practices.
Because smart contracts are automatically executed with pre-determined (and agreed upon) conditions, no longer will businesses need to worry about fraudulent payments or clients not paying their invoices in an appropriate time frame after the completion of a task or product is delivered. Smart contracts are able to function like an improved escrow.
Employment and Freelance Contractors
As one of the benefits that comes with automated payments, smart contracts offer even more advantages for handling payroll with employees and independent contractors. That’s becoming even more important as the current workforce continues to expand into freelance roles in the new so-called “gig economy.”
Smart contracts enable companies to establish quick binding agreements with contractors (or employees) that have predetermined parameters. With that, both parties have clear expectations (from both sides) before even beginning on any work. Then, at the completion of a project and receipt of a deliverable, the determined amount of compensation can be automatically paid out. Again, no escrow (or escrow fees) required! That makes things easier and more efficient for both parties involved and means that gig workers can spend less time worrying about getting paid for their work and more time creating value for their clients.
At the end of the day, it’s difficult for me to think of a single industry or business that wouldn’t in some form or fashion benefit from the implementation of smart contracts in the way they conduct business. Regardless of what sector of the economy you’re working in, there’s nearly always a way to improve efficiency in our day to day operations. The more we can automate, the better. The more middlemen we can cut out, the better. And the less time we have to dedicate to unnecessary tasks, the better. With smart contracts, there are three major efficiency boosters that stick out to me (and many others): removing unnecessary intermediaries, saving time, and saving money.