Unlocking the value of Smart contracts

The Ethereum whitepaper, written and released by Vitalik Buterin in 2013, put in motion the wheels of change that are set to have a profound impact across every industry in the coming years ahead. “Originally conceived as an upgraded version of a cryptocurrency” (Buterin, 2015), Ethereum offered new features that some believed were required from existing decentralised currencies at the time. As Buterin concluded in his whitepaper, however, the “Ethereum protocol moved far beyond just currency” given its quasi-Turing-complete programming language (Grishchenko et al. 2018), which “makes it possible for anyone to write smart contracts” (De Filippi & Wright 2018). Smart contracts were a concept originally proposed by computer scientist, Nick Szabo, in 1994. He analogised them to vending machines, “which take money and dispense products automatically” (Raskin, 2017). 

Another definition is that smart contracts are hard-coded, autonomous contracts that verify and execute unique and specific functions on a blockchain network when specified terms and conditions are met. As such, “smart contracts are a scripting language overlaid on the blockchain that enables transactions on a blockchain that mirror ‘real-life’ contracts by defining if/then conditions” (Compagnucci, 2021). They can be applied to solve a wide variety of use cases, from a basic agreement between two parties (Party A pays Party B) as well as more complex transactions that might require interconnected smart contracts to interact with one another to form a platform that provides operational services. 

Whilst smart contracts have been applied to a wide variety of use cases, they remain in a relatively early stage of their development and although competing blockchain platforms have followed Ethereum’s lead by developing their own smart contract features, “the deployment of smart contracts in the real world still need further testing” (Compagnucci 2021). The “nascent state of the technology means that there are few tested solutions to the legal issues to which smart contracts give rise” (Law Commission 2020). With just 0.5 percent or 40 million of the world’s population actively using blockchain technology today (Edureka, 2021) it provides a sense of how much room this technology has to grow, particularly when we consider that number against the 4.66 billion active internet users of today (Orbelo, 2021). 

Some predict that 80 percent of the world’s population will be utilising blockchain technology in some form by 2030 (Edureka, 2020), which is a rate of adoption that is hard to comprehend. This is particularly true when we consider some of the current user experiences that come when utilising some of the existing blockchain based services that are available today. However, as discussed in a previous ERP Today article, it is during these times that the largest opportunities present themselves and given the high growth projections of blockchain adoption, it makes this a moment in time that businesses cannot afford to overlook – particularly if they are to remain competitive in the future. 

To capture this opportunity businesses must understand “how to evolve at the speed at which things change, largely originating from technology innovations, taking place” (Mundra, 2018). This need is exacerbated further given that the historical barriers to entry that have often protected big businesses from competition are becoming increasingly easier for new market entrants to overcome. In some instances, this is due to regulations that are designed to stimulate competition, such as open banking, whilst other new market entrants have been able to take advantage of the opportunities that blockchain and smart contracts are uniquely placed to unlock. 

 

A central feature of almost every customer experience and a core asset of any business is contracts

 

Mindful of such things, the importance of organisational agility is “becoming essential” (Aghina et al. 2020) and this has also been accelerated by the pandemic, which has created a greater and “immediate need for adaptability, speed and efficiency” (McKinsey, 2021). Agile defined means being “able to move quickly and easily” but to achieve true organisational agility requires businesses to understand the distinction between wanting to be agile and becoming agile. The distinction is important because “agility is a measure of responsiveness” (Harraf et al. 2015) to the external environment and this can only be done effectively if businesses foster safe and empowering work cultures. Such cultures allow teams to reasonably critique and improve current ways of working without fear of reprisal. Empowerment is a pillar that describes the relationship between leadership and employees through authority and autonomy, with the most basic sub- component of empowerment being how centralised and decentralised the organisation is in relation to “decision making authority” (Harraf et al. 2015). 

There is an argument that the more decentralised the decision-making authority is, the more effective their innovation might be. Such models represent “trust in the capability of the involved actors to decide on the best suited solution” (Klein, 2021) towards the challenges and friction points businesses need to overcome. The success of the Ethereum network is testament to the power of decentralised decision-making structures, and with a market capitalisation of $364bn at the time of writing, it makes the Ethereum network more valuable than recognisable brands such as Netflix, Cisco, Nike, Shell, and Wells Fargo

It is business critical for organisations to comprehend these external factors if they are truly to understand and service their customers better than the rest now and in the future. Given that agility is customer-centric in nature, agility and customer-focus become inherently interrelated as the changing demands of customers produce new demands on business operations. This must be accounted for when evaluating the external pressures that influence the organisation’s overall agility (Doz & Kosonen, 2008), particularly when business-to-business expectations are beginning to mirror business-to-consumer expectations. According to Salesforce (2018), 82 percent of business buyers want the same experience as when they’re buying for themselves but only 27 percent say companies generally excel at meeting their standards for an overall business to business experience. Customers are demanding faster, frictionless and more trusting experiences. 

A central feature of almost every customer experience and a core asset of any business is contracts. Whilst they “pervade every aspect of our lives” (Stim 2016) they have eluded effective automation and digitalisation, which leads to delay, inefficiencies and lost value. Research conducted by World Commerce & Contracting (2020) found that the “typical contracting process has more than 40 friction points for each party, the buyer and the seller.” Admittedly, this is not a “one size fits all” problem, with some industries able to use standardised agreements more frequently. Indeed, “it is when agreements become negotiable, or when products or services are customised, that the intensity of friction increases.” 

Friction impedes the agility of any organisation and contradicts the ideals of customer-centricity that underpin it. “To deliver value, the contracting process must make the user its priority” (World Commerce & Contracting, 2020); therefore, consideration of digitalising contracts and contract management without using smart contracts makes that task increasingly difficult. Historically it has been argued that smart contracts are not ‘smart’. However, with the evolution of blockchain oracle providers, the infrastructure required to automate smart contracts is now being laid. 

Given the average added-value to be achieved from friction-point reduction and elimination is estimated to be equivalent to 0.5 percent of contract revenue or spend, and 12-15 percent for complex contracts (World Commerce & Contracting, 2020), it’s easy to understand why Ethereum is so valuable. It has never been more important for business to act.   

 

Wayne Lloyd, CEO, Smarter Contracts

 

 

 

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