By way of autonomous enforcement of a contract between two or more parties on credible blockchains, smart contacts may pose a competitive threat to notaries, financial sector intermediaries and possibly even lawyers.
However, for this particular “triumph of the nerds” to happen, we will need a larger scale of adoption. For this to happen, a deeper understanding of blockchain, smart contacts and their potential benefits and pitfalls needs to be established among those who will use them the most – in the event of mass adoption. This would mean most of us.
Fortunately for crypto currency and blockchain enthusiasts, this seems to be the scenario that is playing out. Interest in blockchain based financial products is booming and a number of banks have gone a little further than talk about teasing the idea of smart contact and blockchain integration.
So, What Exactly is a Smart Contract?
The simplest way to explain what a smart contract is would be to call it a program that was developed to automatically enforce the stipulations of a contract/transaction without the need for user input or verification form a third party.
How Does That Affect Commerce?
As basic as the concept of the smart contract is – the “contracts” themselves – hold great potential to change to the way we transact, by injecting a good dose of efficiency into the current system.
One good example of this would be smart contract enforcement of intellectual property rights.If a musician were to compose a song and protect their intellectual property using a smart contract, with their set stipulations on using the song encoded into the protocol.
To that effect, anybody who wishes to use the said song, they would have to strictly follow the set rules e.g detailing how they plan to use it and paying a royalty, prior to gaining legal access to the content. This could all be completed without the need to consult a lawyer.
Naturally, this is not the only space that stands to be disrupted. The business of supply chain management could benefit a great deal from blockchain and smart contract adoption, as all parties involved would be subject to the same version of events – regarding a product’s journey from the factory to the store shelf.
Smart Contracts could prove themselves a real asset in this sense. Because the contract would only execute once all the given criteria are met with, it would make your supply chain fraud resistant and make it easier to pinpoint a faulty link in the chain.
However, one should keep in mind that very few things – if any at all – that is man made are truly flawless, essentially in the early stages. The same would apply to smart contracts.
The Potential Pitfalls to Come
Global insurance giant, AXA, was one of the first multinational punters to get a taste of the bitter side of early adoption.
In 2017, through an Ethereum based offering dubbed fizzy, the company embraced the adoption of smart contracts for automated flight delay insurance payouts. The smart contract was developed to sift through flight data and automatically settle payments on delayed flights.
However, towards the middle of November 2019 AXA announced that the end of the Fizzy endeavor was here, due to a lack of consumer interest.
This is an indicator of how few of the people that would directly benefit from blockchain and smart contracts are actually aware of them, and their potential upside. This, however, may only remain true in the short term.
Another potential downside to smart contracts – especially those that are built on the most prominent blockchain for such technology, Ethereum – is that being fully committed to the ledger is costly, immutable and also presents a major computing task if there are many transactions.
Luckily, a solution to these problems already exists in the form of the lightning network and/or other similar technologies. The blockchain does not necessarily have to process every single smart contract related transaction. Instead, the blockchain can act in much the same way as a judge would. Only stepping in to enforce those that might be in breach of the contractual agreement.
Though a bit of work still needs to be done, especially in the way of increasing consumer awareness, smart contracts may very well have the game changer potential their proponents have touted them as having.