Photo by Ehimetalor Akhere Unuabona on Unsplash.
The application of smart contracts can streamline transactions across the globe. Friction points smart contracts can solve begin with the automation of trust between parties. This is blockchain’s primary purpose.
Smart contracts can reduce the operational friction required to validate ownership, identity and contractual terms by allowing participants to interact directly with one another with no middlemen providing verification.
Can blockchain improve commerce and the supply chain? Only if you can make practical use of it
Currently, blockchain is still a nascent technology, and a bit daunting to implement for companies and organizations. Still, many enterprises have been examining the friction points smart contracts can solve, fuelling interest. Examples are multiplying of blockchain being used for supply chain management. Yet, as often as not, it’s the “wow” factor that is the focus, rather than the “how” factor.
In addition to focusing on solving data management problems with blockchain, the data processing capabilities of smart contracts are a topic that frequently comes up. We learned about the friction points smart contracts can solve early on when experimenting with blockchain prototypes.
A typical company has procurement, production, storage, and distribution of data to deal with. It has supplier, partner, subcontractor, and customer relationships. It also has an internal organisation by function or department. In silo mode, each department or partner uses its own systems to track products and services.
That means friction goes up and transparency goes down.
These chains of information flow usually need holistic management to work well. Actions in one area often have impacts on others.
For instance, you might try to lower inventory to save money. That can then cause delays in serving customers. Your efforts to save money end up hurting customer satisfaction. Some technologies, like smart contracts, can be applied to certain parts of the process to bring real improvement.
So which friction points can smart contracts solve?
Smart contracts can be applied piecemeal. True, the most value may still be derived from using them end-to-end, from procurement to customer delivery. However, they can also be used on individual parts of enterprise operations. Blockchain and a smart contract can reduce both the time and effort to work out payments between companies and suppliers that need to be made. Today, certain business activities are being designed around blockchain, because it meets their needs. Future supply chains might be built in this way too.
When it comes to trust – or lack of it – smart contacts are a real lifesaver. The technology can be used to streamline transactions across the globe. Yet it assumes nothing about the honesty of people using it. As a specific use case of blockchain, smart contracts operate in a “permission-less” mode. It has functionalities to prevent fraud. It also makes it hard to produce each new block of transactions, before gaining consensus from participants about adding the new block to the chain. This “proof of community engagement” requirement further discourages cheating but increases the amount of effort to make the system work.
Yet smart contracts can also work in the context of trust. Within an enterprise, trust may be assumed between different departments. External partners, if there are not too many of them, can be identified and brought into the equation in a trusted way. Trustworthy behaviour can be enforced by signed agreements that specify how participants are to use the blockchain system. To know more about building trust through Trakti you can read this article.
While the entire enterprise system may not be technically oriented, a good smart contract platform like Trakti can make it simple for participants to ask for admission to the system and orchestrate smart legal contracts on the fly.
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