What could smart contracts do for business?

Blockchain, the buzzword in the boardroom, is fast becoming one of the most significant considerations for major spend by businesses across sectors.

A smart contract stores a business’s terms of agreement, and can then verify and execute those agreed terms

Deloitte’s 2018 Global Blockchain Survey of 1,000 executives spanning seven countries and nine different industries confirmed blockchain as a priority when it comes to budget planning, with 40 per cent confirming their organisation will invest upwards of $5 million in the technology over the next 12 months.

The survey also showed more than 75 per cent believe that without blockchain their business could lose competitive advantage, but in spite of this concern 33 per cent said they remained uncertain on the return on investment in the technology.

According to the report: “The only real mistake we believe organisations can make regarding blockchain right now is to do nothing. Even without a completely solid business case to implement, we believe that organisations should at the very least keep an eye on blockchain so they can take advantage of opportunities when they present themselves.”

Blockchain is already proving its worth with smart contracts

While the future appears promising for the adoption and implementation of blockchain, with so-called smart contracts among businesses in various sectors worldwide, to date it has been slow.

Eric France, partner at law firm Mills & Reeve, says: “This technology is in its infancy and the applications for it are still being defined, but the unique properties of distributed ledgers are already proving to be highly useful.

“The key innovation of blockchain technology is that distributed ledgers keep all copies of the ledger identical, in real time, for every member of the network. This provides a new way of allowing people to enter into contracts with each other, where the history of their agreements is logged in a way that can be verified, but not altered.

“While the record of the contracts is logged, information that the parties wish to keep private can be securely encrypted. The system is safely distributed across many computers with no single point of failure, protecting against the threat of a cyber-breach.”

How do smart contracts work? 

The use of smart contracts – a direct, digital relationship between interested parties – has grown in line with blockchain, in spite of the term being discussed initially back in 1995 by computer scientist and cryptographer Nick Szabo.

By enabling businesses to communicate directly, removing any reliance on a middle man or third party, a smart contract stores a business’s terms of agreement, and can then verify and execute those agreed terms.

Saswata Basu, founder of 0chain, explains: “Smart contracts let you programmatically make a transaction based on an event. This removes the human element of communication, interactions and errors associated with such.”

Mr France says that by offering clients a superior experience, smart contracts have the “potential to give companies a competitive advantage”.

He adds: “Smart contracts stand to dramatically enhance supply chains, increasing automation and speed, reducing the need for agents and other middle men, limiting human error, avoiding manual record keeping, and building up certainty and trust between parties.”

How AXA’s smart contract makes compensation lightening fast

Deloitte’s research into blockchain demonstrates that successful implementation has largely been among more digital-based businesses, with traditional organisations lagging in the adoption of the technology.

For established businesses, a significant concern is how blockchain would fit into an existing paradigm and, ultimately, what the overall benefit would be. This differs significantly from the digital organisations that have been built with blockchain already in existence.

In spite of this, there have been some interesting success stories surrounding smart contracts which, according to Mr France, have predominantly been within the insurance industry.

He highlights one of AXA’s products as a great example of how this particular sector is well placed to benefit from technological advances in this area.

“AXA’s product ‘fizzy’, for example, uses distributed-ledger technology to offer direct, automatic immediate compensation to policyholders whose flights are delayed by more than two hours,” Mr France says. “The fizzy product works by recording the purchase of flight delay insurance on the Ethererum blockchain platform. The smart contract is then connected to global air traffic databases, so as soon as a delay of more than two hours is observed, compensation is triggered automatically.”

Mr Basu also cites IBM, Microsoft, Oracle, AWS and CitiGroup as great examples of businesses that have started to implement blockchain solutions, adding: “The most notable implementation is Walmart with its supply chain and logistics.”

He explains: “Blockchain and smart contracts reduce transaction and escrow times and associated costs by eliminating the need for human interaction. It also enables higher transparency and trust that is better than a traditional trusted entity or individual.”

Smart contracts let you programmatically make a transaction based on an event. This removes the human element of communication, interactions and errors

How smart contracts are being used to clean up the supply chain

For Walmart, the use of blockchain technology was borne out of a bad batch of lettuce resulting in the sickness of a large number of its customers. Having conducted a two-year pilot, the supermarket chain announced in September the rollout of the technology enabling them to track every lettuce.

By 2019, the organisation will require the majority of its farmers to provide detailed information about their produce to a database. For any future sickness outbreaks, the business would be able to identify and dispose of just the affected batches, rather than clearing entire shelves of fresh produce.

According to reports by The New York Times, the same system, which was developed by IBM, is also being used by Dole, Wegmans and Unilever to track produce as it moves through the supply chain.

Mr Basu says: “Supply chains have working capital and SLA [service level agreement] inefficiencies that can be streamlined. If goods shipped and received today are recorded on the blockchain, then SLA enforcement and payment can be done faster and cheaper.”

Blockchain and smart contracts, although successful for some organisations across a range of sectors, are yet to be widely adopted. Deloitte’s research demonstrates that while early adopters believe in blockchain’s potential to disrupt and revolutionise their industries, the problem lies in the limited number of active case studies demonstrating the wider benefits.

But in an increasingly digital world, with advances in emerging technologies such as automation and the cloud, businesses will find it hard to ignore blockchain. As Deloitte’s research concludes: “We see the potential for blockchain to help organisations create and realise new value for businesses beyond anything we can imagine with existing technologies.”