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July 19, 2017

Smart Contracts: Introducing A Transparent Way To Do Business

Posted by Manjunatha Gurulingaiah Kukkuru (View Profile | View All Posts) at 10:10 AM

Smart Contracts: Introducing A Transparent Way To Do Business

Enterprises, irrespective of size or industry, are supported by written contracts. Unfortunately, these are often cumbersome and a source of business and legal conflict. A solution can be found in replacing traditional contracts with smart ones. A smart contract is an agreement, in the form of a computer program that is executed automatically once certain pre-programmed conditions are satisfied. On blockchain, the goal of a smart contract is to simplify business and trade between both anonymous and identified parties, sometimes without the need for a middleman. A smart contract scales down on formality and costs associated with traditional methods, without compromising on authenticity and credibility.

Some advantages of smart contracts are:

  • Security - As the distributed ledger is impregnable and immune to alterations
  • Disintermediation - Enables parties to enter into agreements with reduced dependence on middlemen
  • Near real-time execution - As it takes place almost simultaneously for all parties, across participating computers, once the necessary criteria are satisfied
  • Transparency - Creates an environment of trust as the logic and information in the contract is visible to all participants in the blockchain network

Implementing smart contracts is not without its share of challenges, some of these if unaddressed can hinder its immediate adoption:

  • Confidentiality - Though enterprises desire transparency, they hesitate to put their contractual information, which may contain competitive strategies, on the blockchain. While a blockchain platform like Hyperledger is permission-driven and enables parties to engage in a private smart contract (visible only to people party to the contract), Ethereum, a blockchain platform, does not have an option for private smart contracts. Enterprises will, therefore, have to select their blockchain platform based on need.
  • Accuracy - Since a smart contract is a computer program, each term and condition of the contract needs to be coded. There is possibility of misinterpretation and omission by the coder, which may lead to loopholes in the contract. I believe the more we use smart contracts, the more we will encounter these loopholes and code against them.
  • Unreliable Inputs - These could lead to false contracts or non-execution of contracts. In the case of a traditional contract, the parties can proceed to a judicial court for redressal. Unfortunately this is not a possibility with smart contracts where legal validity is still being debated upon.
  • Bugs and errors in the code - These could lead to disputes and procedural difficulties related to identifying errors and the parties responsible for those. They could also cause unforeseen repercussions. This is exactly what happened in June 2016, when a hacker exploited a vulnerability in the code of the Decentralized Autonomous Organization (DAO), which is a piece of smart contract built on Ethereum, and made away with 50 million Ether, a bitcoin-like digital currency.
  • Rogue Contracts - Taking advantage of self-execution and anonymity of smart contracts, illegal activities could also be conducted by smugglers, terrorists, hackers and others.

Smart contracts have the potential to introduce radical change in the way international business and trade are executed by speeding up transactions, reducing paperwork, and bringing about cost-efficiency.

Industries like art, music, real estate, finance, manufacturing, retail, supply chain, and telecom could benefit significantly from smart contracts. The adoption of smart contracts would be hastened if the platforms which host them accept payments in all currencies instead of just cryptocurrencies, and these were brought under the purview of the current judicial system. Two states in the US that have moved in this direction are Arizona, and Nevada. Both enacted legislations this year to legalize smart contracts. Until smart contracts become legally recognized across states and countries, they will be practical for short, individual agreements. But for lengthy, large deals, enterprises will have to turn to flexible traditional contracts.

In some scenarios, we would have to make do with hybrid contracts, which allow for faster, more efficient, and more secure execution of agreements, while also providing a channel for judicial audit and scrutiny.

Infosys Blockchain addresses blockchain and adjacent technologies including shared ledger, distributed ledger and smart contracts. Contact us to know more about our services.

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