Cryptocurrencies and other blockchain applications make headlines, but smart contracts play a critical role in allowing blockchains to communicate and share information effectively.
Whenever a technology emerges into the wider business marketplace, there is almost always going to be some ambiguity and confusion as to how exactly these technologies work. Even with all of the investment, discussion, and attention that has been paid to the blockchain and cryptoasset sector, there is still some ambiguity as to how exactly an implementation project should proceed. It is clear that every organization is different, and that every blockchain implementation will proceed differently, but the importance of smart contracts is something that exists in every situation.
Without getting overly technical, a solid working definition of what a smart contract is can be broken down into two general components. Firstly, a smart contract is a blockchain-augmented representation of a traditional contract, complete with counterparties, rights, obligations, and consideration being transferred between these counterparties. Secondly, these smart contracts allow the execution of either a portion of, or the entirety of, contractual rights and obligations with less human oversight and management. Put another way, smart contracts can automate at least some of the contract fulfillment tasks currently requiring human oversight. The contractual terms and conditions are written directly into the underlying blockchain code, helping to increase the integrity over these terms and conditions.
Taking a step back for a moment the following becomes clear; smart contracts are the application that enables and streamlines the ability of blockchains (no matter what the specifics) to interact with other blockchains or other technology systems. Smart contracts, in other words, play an integral role in how blockchain projects can generate the efficiencies and gains so often discussed as reasons behind implementation in the first place.
This all sounds like a relatively straight forward process, and good news, but let’s take a look at some of the considerations that can complicate the smart contract conversation.
Coding and contracts. One of the first pain points that can emerge in the smart contract dialogue is the initial translation of traditional contracts into a code-based contract. In essence, a traditional contract that is written (either physically or digitally) must be translated into a series of executory statements that are able to be coded and executed on a digital platform like blockchain.
Since this process will, by default, involve both legal and technical experts, it is important to ensure that the meaning and nature of the agreement is not lost in translation.
Flexibility versus rigidity. The purpose of any contract or agreement is to provide assurance over the terms, conditions, rights, and obligations of the involved parties. In addition, contracts outline the measures that can be taken in the instance that any involved party breaches the agreement. That said, and as any businessperson knows, things often do change in the course of business that can require the tweaking and adjustment of contractual terms over time.
Smart contracts need to balance the need for consistent enforceability while also building in some measures and access points to enable flexibility in the face of changing business conditions.
Contractual controls. Although this point is listed last in this conversation, it should also be a topic and idea that permeates every smart contract conversation. Any time a new technology process is layered upon, or embedded within existing processes, special care must be taken to ensure the integrity of the underlying process. In the case of smart contracts it might be tempting to relegate an internal control conversation to the back burner; since blockchains have proven to be tamper resistant, why be concerned about controls?
Actually, as automation and augmentation of existing processes – blockchain driven or not – continues to accelerate, the importance of robust and business oriented controls will increase and become more important. The slew of hacks and data breaches that have occurred, or been at least partially generated due to a lack of controls, highlight the importance of these considerations.
Smart contracts and the associated discussions might not generate the headlines and discussion that other blockchain and crypto news does, but they have an important role to play in the maturation of the sector. Understanding the potential challenges and opportunities connected to this blockchain application is a responsibility that any business professional considering implementing blockchain should be aware of moving forward.
Data integrity, efficiency, and transparency lie at the core of any blockchain project; smart contracts are the often overlooked tool that makes these benefits possible and realizable