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Are Smart Contracts Changing How We Do Business?

Every business owner knows the huge risks associated with transacting with external parties, both known and unknown. Any number of unforeseen or unknown factors, including failure to comply, bankruptcy, or other extenuating circumstances, can make a deal quickly plunge into chaos. While there are many processes in place to protect against these vulnerabilities, no agreement is entirely foolproof. Overall, the idea behind creating formal written contracts is little changed from its roots in English common law.

Enter blockchain, which has catalyzed a tidal wave of innovation across industries and sectors leaving no stone unturned, including the existing contractual paradigm. The proliferation of the decentralized infrastructure has given a breath of fresh air to many outdated processes. While contractual formation is normally considered a relatively boring activity and subject matter, blockchain technology promises to shift the landscape with the first major shakeup in centuries.

The Fundamental Shift Facing The Contractual Environment

While cryptocurrency and fundraising activities remain the most visible applications of the technology, businesses are rapidly embracing blockchain as the practical benefits of the ecosystem become clearer, especially via smart contracts. Whether formulating an agreement with suppliers, sharing rights to intellectual property or even facilitating an employment agreement, smart contracts already have the potential to transform many common business processes.

Smart contracts help companies benefit from a more streamlined approach while creating unbreakable agreements. In addition, this new contractual paradigm helps significantly reduce potential counterparty risks and the need to establish trust between parties while reducing the presence of costly middlemen and legalese.

Transact Without The Need For Trust

One of the best features of blockchain technology is the unrivaled transparency a distributed and decentralized ledger delivers to users. Ultimately, a smart contract acts as a programmable third party that is impartial and designed by the contract participants themselves. As a logic-based system, a smart contract is intended to cover every aspect of a transaction from start to finish. It could be imagined as a very elongated “if/then” function that covers every inevitability that could arise from an agreement. Once established, a smart contract governs every interaction between the two parties, automatically responding to inputs from either party and executing the agreement as programmed.

A perfect example would be insurance giant American International Group Inc's (NYSE: AIG) recent development of a smart contract to facilitate a complicated cross-border insurance contract. Although the exact terms were undisclosed, the smart contract likely stipulated that the insurance buyer put a premium in an escrow account for which they received coverage. By extension, AIG might have had to post the potential payout in an escrow account to fulfill its side of the policy. If an event triggers an insurance payout during the coverage period, the payout funds held in escrow by the smart contract are delivered to the policy holder while the premium is sent to AIG. If no trigger occurs before the contract lapses, the smart contract would then release the premium and payout funds to AIG and conclude. In addition, if AIG failed to provide the service, the premium held in escrow could theoretically be returned to the policy holder.

The notable advantage of such a system is improved protections for each party to an agreement that effectively reduces the potential for manipulation or nonfulfillment. However, this is just one feature of smart contracts that will ultimately change how businesses interact.

Designed To Simplify The Formerly Complex

Contracts can quickly go from simple to complex, requiring multiple rounds of revisions as each party to a transaction seeks protections and language that will allow for recuperation if the counterparty fails to deliver. One of the most beneficial aspects of smart contracts is the ability to bypass these services in favor of a third party that does not assess steep fees. Instead, a smart contract represents an impartial third party that is designed to advance both parties’ interests without the need for a broker.

Already, large scale enterprises are embracing the benefits of this simplification and increased transparency as evidenced by AIG’s participation and Oracle Corporation’s (NYSE: ORCL) race to build its own smart contract platform. One company at the heart of the revolution is smart contract platform provider Jincor. The technology startup has built a system that seeks to simplify the process of building and implementing smart contracts while handling exchange of payment and even arbitration between parties if the need arises.

However, the main impediment that stands out as a barrier to more mainstream smart contract adoption is insufficient knowledge and a steep learning curve. One reason Jincor and its contemporaries have been effective at attracting users is that their platforms have been designed for companies unfamiliar with the inner workings of blockchain and the underlying technology. As more businesses recognize the advantages of transacting on blockchain alongside the increased security and automation afforded, it is likely that the pace of acceptance will concurrently accelerate.

The Changing “How” Of Doing Business

Though the fundamentals of conducting business may not necessarily be upended by blockchain, smart contracts are certainly playing a role in altering the “how” aspect. Industries from supply chain management to financial services and banking are embracing the smart contract revolution. With such a widespread appeal, the increased acceptance of smart contracts is likely to spur a series of innovations that will help support common objectives such as automation, cost-cutting and transparency, forever changing the business ecosystem and the rules governing how parties interact.

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