Contracts have long created headaches for the business community. Traditionally authorized by third parties such as banks and courts, business contracts can be expensive and time consuming, in addition to often ending in disputes — or even lawsuits. However, blockchain technology and the Internet of Things (IoT) could allow for “smart contracts” that eliminate the need for third parties in order to make contracts far easier and less expensive.
How Do Smart Contracts Work?
Unlike traditional contracts, smart contracts exist as unalterable digital code on the blockchain, a decentralized digital ledger of transactions that records data in a way that prevents hacking and altering of data by duplicating transactions and dispersing them to “nodes” across the network. Furthermore, the physical goods associated with these contracts, such as shipping containers, can be automatically traced with IoT devices and sensors, making them easy to trace and document.
After conditions are met between the various parties involved, the smart contract automatically executes, and begins next steps in the process. Because everything in the contract exists as code, it eliminates potential for human error and added fees. And since the terms are all predetermined and automatically enforceable, they cannot be manipulated or misinterpreted.
What Are The Benefits of Smart Contracts?
As we discussed in a previous post, this seamless integration of contracts could revolutionize the way businesses operate. There are many ways smart contracts will improve businesses in the future. According to the legal site JDSUPRA, these include:
Automation: Smart contracts will allow businesses to automate the contract process, and trigger next steps without any human interference. “They can also send notifications and automate processes such as dispute resolution, document reconciliation, and discrepancy identification.”
Risk management: Smart contracts eliminate the possibility for mistakes often made in the process of drawing up big contracts in which many conditions have to be met, and save time in the process. Instead, both parties agree on the release of payments once certain milestones are met. “This way, the service provider has incentive to make sure they maintain the agreed upon schedule and the paying party can have assurance they will not have to pay for work that has not been completed.”
Time and money: Smart contracts allow for seamless money exchange, so that costly and time-consuming bank transfers and direct deposits are unnecessary.
Confidence: Businesses can rest assured knowing that smart contracts are securely tracked and recorded on the blockchain. This mitigates concern that terms of their contracts may have been altered before they were signed, as well as reducing the potential for disagreements and legal battles.
Simplifies the job of human resources: Because smart contracts are traceable and seamless, they make it much easier for employees, businesses, and HR departments “to satisfy their obligations and comply with company policies and regulations.”
Creates certainty: Because smart contracts leave “no room for interpretation,” they will help eliminate long negotiation periods, contract breaches, legal disputes, and disagreements over whether terms were met. “All parties can see the terms set forth in the code, whether conditions have been satisfied, and what dispute resolution process corresponds to each step of the contract. As a result, there is no doubt what will happen.”
Smart contracts do come with some potential pitfalls. Examples include the potential for flawed code or data, and the inability of parties to reverse any mistakes made in the original contract once it is initiated. With smart contracts, there is simply no room for error of ambiguity. However, given their vast benefits, there is little doubt that many organizations will eventually adopt smart contracts.
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There is a veritably deafening buzz around blockchain at the moment as it’s the technology du jour. And rightfully so, as it ticks a lot of boxes: it’s decentralized, anonymous, and immutable. It also promises security through truth and transparency.
Amid the excitement about it, brands are rushing to embrace the ledger technology. Upon announcing that they’re working with, or will soon incorporate, blockchain technologies, their stock price skyrockets.
The Blockchain Bounce Phenomenon
This is called blockchain bounce.
Don’t believe us? Take Overstock, for example, whose share price rose +200% post-announcement of a loyalty plan built on blockchain.
Or restaurants like Chanticleer Holdings (whose brands include American Burger Co. and Little Big Burger) and Hooter’s. Both stocks became hot simply because of their association with blockchain.
It also happened to Kodak recently, when it partnered with WENN Digital to launch a blockchain-powered image rights platform, called KODAKOne. Shares of Eastman Kodak’s stock surged more than 30% on the announcement, closing at $6.80.
As the New York Times noted, these bold gambles have had mixed reactions among investors: some are excited, others confused, with a majority curious about “wading into dubious business deals” in search of instant growth through blockchain bounce.
Are businesses that attach themselves to blockchain merely a fad? Or will utilizing blockchain to provide the building blocks for a company’s future have an Amazon-like effect, as Starbucks Chairman Howard Shultz predicts? Could the blockchain bounce make a difference for your company? Share your thoughts in the comments below!
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It’s clear blockchain isn’t going away anytime soon. Which is why it’s in your business’ best interests to learn as much as possible, as soon as possible, about it. To make sense of the recent blockchain revolution, you’ve got to understand what a blockchain really is and what it’s capable of doing. The best place to start is with the new IEEE Introduction to Blockchain Technology 3-course program. Pre-order for your company now and save.
