The last decade can be characterized by the increased importance of technologies in the modern business world as the method to enhance efficiency and attain better results. Under these conditions, the topic of Blockchain smart contracts acquired an outstanding significance as one of the ways to achieve better performance.
The reason preconditioning the high relevance of the selected issue is its disputable character and potential benefits that can be generated due to the utilization of this technology. A smart contract is a special protocol that is introduced with the primary aim to facilitate and enforce the process of negotiation between parties and achieve a particular agreement that would satisfy all agents (Alharby, & van Moorsel, 2017).
There is the idea that this innovation can help to reconsider the modern business world and introduce a new environment. At the same time, there are multiple issues regarding the security of transactions, the reliability of Blockchain smart contracts, and the management challenges faced by entrepreneurs during the implementation of this approach. The problem of utilization should be solved to ensure the further development of the practice and its wide use.
The topicality of the issue preconditioned the emergence of multiple research works devoted to its investigation. The main idea is that the Blockchain technology can be a potent tool in facilitating the development of the business world and improvement of the negotiation process by introducing new methods and excluding third parties from the agreement (Alharby, & van Moorsel, 2017). However, there are also some risks related to the given problem such as the loss of objectivity, technological fails, and problematic implementation because of the lack of experience.
At the same time, there are also gaps in the research devoted to the issue. For instance, the sphere lacks studies on scalability and performance issues which promotes the emergence of particular problems. Moreover, there is no clear understanding of how to deploy mart contracts on different Blockchain platforms other than Ethernum (Alharby, & van Moorsel, 2017). In such a way, there are multiple options for further investigation of the problem. It is critical to answer the questions how the technologies can be implemented and what solutions can be used.
Regarding the facts mentioned above, the paper suggests several main points. First of all, the elimination of existing gaps in knowledge will help improve the implementation process and attain better results. Second, the Blockchain technology can be considered an appropriate tool to facilitate negotiation and exchange process in the future. Third, a whole new level of efficiency and effectiveness can be achieved but only if management problems are solved (Hill, 2018).
The suggested article contributes to the improved understanding of the chosen topic. It reveals the existing gaps in knowledge and tries to eliminate them by discussing critical elements peculiar to Blockchain technology and its utilization in the various spheres of business. Moreover, the work improves the understanding of the ways how to implement innovations in the existing environment.
The paper is organized to preserve a logic of narration. It starts with the introduction that sets the ground for the discussion and emphasizes the main ideas of the work. There is also the body that includes all basic assumptions and cogitations. The theoretical framework for this discussion is created by reviewing the credible and relevant literature. The central criteria for sources selection were their ability to improve the understanding of the problem, eliminate gaps in knowledge, and create the basis for the discussion. Finally, the body part is followed by the conclusion summarizing the key points and outlining the ways how the technology can be used.
2. Blockchain as the Foundation
Blockchain is a revolutionary technology that has opened a whole new world of possibilities. Blockchain, which is based on the concept of decentralization has allowed us develop many functions like data storage that is distributed, anonymous transactions, smart contracts etc. Blockchain has not only enabled new functions that were not possible before, but it has also allowed new solutions to be implemented in existing problems (Michael & Butcher, 2016). This section gives an overview of the Blockchain technology and discusses the concept of decentralization as the core of the technology.
2.1 Blockchain and Smart Contracts
Blockchain has been talked about in literature since 1991 but the concept was finally brought to life by Satoshi Nakamoto. Blockchain came to the spotlight when Nakamoto introduced Bitcoin, a cryptocurrency based on the Blockchain technology which embraced the idea of a decentralized economy. Bitcoin as a cryptocurrency is a Blockchain based currency that uses a database that is distributed across a network of computers so the transactions are secured from any sort of fraud or error. Since the introduction of Bitcoin, there have been several new cryptocurrencies that have popped up and now are worth hundreds of billions of dollars. The most popular concepts in the decentralized space are the proof of stake and proof of work.
Proof of work is a way in which the users are rewarded by completing complex crypto calculations (Schrepel, 2018). These complex crypto calculations are the reason that Blockchain based bitcoin is considered to be secure from Denial of service attacks. When a transaction takes place, all the computers on the network are expected to be in agreement so that the transaction can be classified as a legit one.
The other popular concept is proof of stake which establishes who will be the creator of the next block in the process. The algorithms that form the foundation are not perfect, however, they are improving at an increasing rate, which means that practitioners are actively finding ways to improve the technology by making the existing design better and also increasing the decentralization in some cases (Wolfskehl, 2018). Sometimes these changes lead to forking, which is one of the disadvantages that practitioners are trying to fix.
Understanding Smart Contracts
Smart contracts are digital contracts which are based on complex algorithms that allow them to be fulfilled once the preset conditions are met thus allowing automatic execution. This smart contract technology has further evolved as Blockchain technology has grown. It’s now at a stage where Blockchain based smart contracts are paving the way of how contractual agreements will look like in the near future.
The technology is being welcomed with open arms by governments and companies from all over the world. One of the major advantages of smart contracts is that they eliminate the need for any middle man which means that there is likely to be minimum human intervention in the process, thus making the process more effective and efficient at the same time. They also make the whole process automatic which allows the contract to be executed in a conflict freeway and makes the process of exchanging any property much smoother (Karamitsos et al, 2018).
The proponents of smart contracts believe that it will help in lowering the transaction cost against what is being incurred in the traditional methods where the third parties are engaged for the enforcement and the execution of agreements (Luu et al, 2016). The traditional legal contracts’ enforcements require that the presence of trust is there, legal entities are there, and others.
These are comparatively time consuming. On the other hand, smart contracts does not require these challenges. In the smart contract, there are two aspects, namely, smart contract code and smart legal contract (Stark, 2018). The former is “stored, verified, and executed” on the Blockchain. The recording of the program takes place on the Blockchain, it stores and transfers the amount, and the execution of the codes take place by the Blockchain which means that the execution can take place only in the written form and interference with its operation is not possible. The smart contracts, in the financial or legal terms, has entirely different definition. The smart legal contract is one use case of the code. It can be used to complementing and replacing the legal contracts.
Smart contracts are not limited to particular business or industry. Though there are several types of legal contracts in the world, however, only few of them can be considered as idle candidates to fit the smart contracts. A particular legal contracts can be from any discipline such as sale of houses and land, exchange of intellectual properties, financial instruments, and small services at small scale.
The usage of smart contracts is gradually entering into the financial sphere. Though it will be difficult to find the smart contract implementation for the financial instruments, however, there are entities who are investing resources to build in this aspect. The proponents of the Blockchain technology are viewing huge possibilities in the future for the smart contracts. The smart contracts are likely to complement or bring in new facilities in the contract making (Omohundro, 2014).
Benefits of Smart Contracts
It is being considered that smart contracts bring in several benefits which is stronger than the other methods of contract development. The speed and accuracy can be considered as one of the major benefits. Unlike traditional method, the automated and digital contract development can be done very fast. This will save substantial amount of time of the entities engaged in the contracting activities. Moreover, the correction and reconciliation of mistakes in the contract can be easily rectified which is difficult in manually filled documents (Savelyev, 2017).
Another benefit of the smart contracts is the trust factor. Smart contracts work based on the rules that are predefined and the transactions take place on its own without human interventions such as signing or filing which happens in the paper based contracts. Moreover, as the records of the transactions are shown to the entities or individuals participating in the process, there is less likely to be any opportunity where the questions can be asked on the information present in the contract.
Moving further, smart contracts also provides enough security that is impossible to breach with the existing technology in the market (Delmolino et al, 2016). The encrypted recording of the transactions are very difficult to be attacked by the hackers for their personal benefits. Considering the nature of the Blockchain, where the records are attached with one another, and alteration in one record will require that the entire record be updated. As previously discussed, in addition to the security, speed, accuracy, and trust, cost is the key benefit that can be gained by the entities.
Performance, Scalability, and Smart Contracts
Though there are good amount of positive hype around the usage of smart contracts, however, at present the implementation of smart contract is likely to hit the technological challenge. The use of public Blockchains are difficult considering that the number of transactions processed per second are relatively low and therefore the implementation at the global scale seems a far story. However, there also exists permissioned blockchains (Scherer, 2017). These kinds of blockchains are restricted in its form and cannot be used at public scale. In this form of blockchains, only certain number of users define the things that can be recorded in the blockchain.
Though this is of the closed form, but it has several benefits in comparison to the public blockchains. One of the key benefit is that it allows the ability of splitting the network into several segments. In this method, only certain number of nodes can be used for the purpose of validating the transactions for the requested applications. In addition, the validation of the nodes can be considered faithful.
The study conducted by Mattias Scherer (2017) compared the public and the permissioned blockchain. The study led to the understanding that the permissioned blockchains are comparatively better in the performance and can be scaled at the desired scale in comparison to the public blockchain. The author argues that if the financial sector wants to bring in improvement in the performance and the scalability in the blockchain technology, then the usage of permissioned blockchains can be facilitated.
This blockchain method wards off three key concerns in the blockchian sphere. They are security, decentralization, and the scalability. The study further led to the finding that with the reduction in the decentralization, the blockchain network can be made more scalable and the performance can be improved significantly (Buterin, 2014).
Uncertainty, Complexity, and Smart Contracts
The usage of smart contract is likely to help the industries in reducing the uncertainty and complexity. As previously stated, smart contracts will remove the unnecessary intermediaries, and as a result reduction in the complexity can be expected. The smart contract will act as the contractor and may eliminate the layers of intermediate entities facilitating the contract. The smart contract system can be handled successfully by the two parties for governing and enforcing the contract. In addition, if the contracts are of multilateral nature, then an entity can engage in handling of the recording of the transactions (Catchlove, 2017).
The third party can act transparently to facilitate this transaction. As the information will stay public, therefore, there may not be the opportunity of playing power games. Moreover, it brings in appreciable level of efficiency in the process. Another benefit in terms of reduction of complexity is that it may engage in the declaration of activities that are to be completed by the contracting entities. As per the resolution of uncertainty is concerned, the smart contracts system brings in more stability. The closed billings and contracts in the traditional method assume a risk in cases of business and customer relationship where there exists fear of ambiguity in the contracts. The smart contract helps in the reduction of uncertainty among the parties by keeping the information clearer to the parties.
A Decentralised Revolution
A full decentralization agreement needs to have complete distribution of information amongst all the members in the network. Bitcoin achieved this successfully through Blockchain and this allows all the transactions to be in agreement and all this information is public. However, some consider privacy to be an issue even though a strong encryption can effectively hide transaction details (Macrinici et al, 2018)
Blockchain and Finance
Blockchain and smart contracts are a match made in heaven when it comes to their applications in the fin tech industry. One of their applications with the most potential can be seen in the Trading industry which currently involves a lot of manual paperwork to fulfil the contractual process that happens the behind the scenes. By using Blockchain based smart contracts, organisations will be able to save huge amounts of money and not to mention the significant increase in the efficiency there will be due to the lack of human error that is usually involved in manual paperwork (Curran, 2018).
Blockchain can make contractual process between the companies in different countries relatively straightforward by reducing the frictions usually present in trade. Blockchain offers two major streams of solutions- 1. Better tracking of shipped goods 2. Money exchange solutions (Huang et al, 2018).
Another major applications of Blockchain is providing trust in payments. Bitcoin was one of the first innovations in this area. Ever since Bitcoin, the technology has experienced an unprecedented rate of growth and now all the major players in the financial industry are jumping on the bandwagon (Hsiao, 2017).
There are multiple other applications of Blockchain in finance, notably in the money lending space. Smart contracts provide increased effectiveness and efficiency by greatly reducing costs and making the process more accurate and reliable (Zhao & Coffie, 2018).
Conclusion
The word Smart Contract has not always been linked to Blockchain. People used to think of smart contracts as just a normal digital contract, but with the rise of Blockchain technology, that has changed. Blockchain based smart contracts have evolved to a stage where they now offer several benefits over the standard digital contracts. The whole process of the finalising contract is carried out digitally using complex computing methods by the Blockchain technology.
This contract exists in the form of complex code on the peer to peer network which makes it almost impossible to destroy. Another one of the advantages is that the contracts can be set up in a way that they will only be executed as per the commands given to them on their set up. The applications have been discussed in detail in the article and it is clear that wide scale adoption of smart contracts is bound to happen in the near future.
The popularity of Smart Contracts using Blockchain technology has been growing at a rapid pace. Several companies and governments have already started adopting the technology and this has further given a boost to smart contracts. The benefits of smart contracts are very clear at this stage and more research is being done on how Blockchain based smart contracts can be integrated in an organisation’s operations.
There are management problems that exist but are being researched and there is a lot research also being done on the uses of Blockchain technology. In conclusion, Blockchain based smart contracts are not just a thing of the future anymore, they are here and ready to be enforced. The knowledge gained through this article can be utilized by the readers in their further quest to understand the various aspects of smart contracts.
References
Buterin, V., 2014. A next-generation smart contract and decentralized application platform. white paper.
Catchlove, P. 2017. Smart Contracts: A New Era of Contract Use. SSRN Electronic Journal.
Curran, K. 2018. Setting the “Gold Standard” in Blockchain. The Journal of the British Blockchain Association, 1(1): 1-3.
Delmolino, K., Arnett, M., Kosba, A., Miller, A. & Shi, E., 2016, February. Step by step towards creating a safe smart contract: Lessons and insights from a cryptocurrency lab. In International Conference on Financial Cryptography and Data Security (pp. 79-94). Springer, Berlin, Heidelberg.
Hill, T. 2018. Blockchain for research: Review. Learned Publishing, 31(4): 421-422.
Huang, H., Li, K., & Chen, X. 2018. Blockchain-based fair three-party contract signing protocol for fog computing. Concurrency and Computation: Practice and Experience, e4469.
Hsiao, J.I., 2017. Smart Contract on the Blockchain-Paradigm Shift for Contract Law. US-China L. Rev., 14, p.685.
Karamitsos, I., Papadaki, M., & Barghuthi, N. 2018. Design of the Blockchain Smart Contract: A Use Case for Real Estate. Journal of Information Security, 09(03): 177-190.
Luu, L., Chu, D.H., Olickel, H., Saxena, P. and Hobor, A., 2016, October. Making smart contracts smarter. In Proceedings of the 2016 ACM SIGSAC Conference on Computer and Communications Security (pp. 254-269). ACM.
Macrinici, D., Cartofeanu, C., & Gao, S. 2018. Smart Contract Applications within Blockchain Technology: A Systematic Mapping Study. Telematics and Informatics.
Michael,, J., Cohn, A. & Butcher, J.R., 2018. BlockChain technology. The Journal.
Omohundro, S., 2014. Cryptocurrencies, smart contracts, and artificial intelligence. AI matters, 1(2), pp.19-21.
Savelyev, A. 2017. Contract law 2.0: ‘Smart’ contracts as the beginning of the end of classic contract law. Information & Communications Technology Law, 26(2): 116-134.
Scherer, M. (2016). Performance and Scalability of Blockchain Networks and Smart Contracts. Umea University.
Stark, J., 2018. Making Sense of Blockchain Smart Contracts – CoinDesk. Retrieved from https://www.coindesk.com/making-sense-smart-contracts
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Zhao, H., & Coffie, C. 2018. The Applications of Blockchain Technology in Crowdfunding Contract. SSRN Electronic Journal.
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