Blockchain technology has developed from a topic for thought leadership to a solid use case for companies. More and more companies are wondering how they can use blockchain technology. One answer is smart contracts with blockchain. The advantages for contracts in the business environment are obvious, unifying already known approaches to blockchain technology such as decentralized networks, cryptography and digital signatures. Blockchain makes it possible to carry out transactions without a trust-creating instance being necessary. Trust and efficiency thus experience a never-before-seen increase. In the blog, we highlight the use case of smart contracts with blockchain and how far this has already developed. What can blockchain do in the context of a company? Is it hype or innovation?
What are smart contracts?
Smart contracts are contracts between different parties in which transactions are executed automatically without human assistance. In smart contracts, a program checks whether or not the contract conditions are met and triggers a programmed instruction. Smart contracts model contracts as computer protocols or monitor their execution with technical support. A written form of the contract, whether on paper or as a file, is therefore unnecessary. A good example of a smart contract is a vending machine. The programming in the machine registers that a coin has been inserted (the first condition for the contract) and initiates the dispensing of the goods (the second condition for the contract). If no drink comes out – for example because nothing was selected or there is no more of what was selected – the machine returns the money. One condition of the smart contract was not met, and the contract was canceled.
But what if neither the beverage or the money that was inserted come out? No one is likely to involve a lawyer for two Euros for a soft drink. Things are different when it comes to a loss of two million Euros. This is where the blockchain code comes into play.
How does blockchain technology work?
The blockchain is a distributed database. Distributed databases have been used for years, for example when a bank distributes its data across a variety of server centers. However, to date distributed databases have always had a central institution which is responsible for the data and administrates it: the bank itself. If the bank drops out as the central administrator of the data, all the data are gone. On the other hand, in the blockchain the responsibility for the data is not only decentrally organized, it is also distributed across very many equal actors at the same time – a peer-to-peer network. The more actors, the more secure and more reliable is the transaction.
The Evolution of Databases: Central – Decentralized – Distributed
The transactions of contents, information or documents are encrypted in blocks, linked together in the blockchain and can no longer be altered at a later time. All the data and documents stored in the blockchain have a unique hash value and only the smallest change – even if it’s only a pixel being colored – changes that hash value. That way, every process can always be tracked, up to 100 percent, making it impossible to manipulate a smart contract in the blockchain.
Smart contracts via blockchain – from Bitcoin to Business
In a world growing increasingly faster and more complex, it is impossible for a single person to retrace every process step in contracts. Therefore in order to be able to enter into any business relationships at all, trust is necessary. Or a third instance which creates trust. The transactions of valuable and unique data and documents such as money or contracts are thus very elaborate and expensive. However, the technological basis of the blockchain provides transparency and traceability through decentralization – objective, unchangeable and without an intermediary, and thus, in the use case of smart contracts, has immense importance. With blockchain technology, two parties no longer need an intermediary to guarantee trustworthiness, and the transaction costs for valuable data fall to a minimum
Blockchain technology in practice – processes become transparent and trustworthy
Does the coffee really come from an organic farm in Venezuela? In order to be able to answer these and similar questions securely and reliably, since 2016 Wal-Mart has worked with IBM, which provides the American retail company its blockchain technology, in order to guarantee new requirements for food safety for it suppliers. The goal here is to be able to follow the points through which foodstuffs go, from production to store, in real time. This way, Wal-Mart reduces foodborne illnesses and losses for the retailers.
Blockchain meets Smart Contracts: status quo and outlook
There is no industry today which is not engaged with use cases for blockchain technology. But the blockchain is only the technology, it is not a concrete solution. Companies should in no way follow the hype, just because everyone else is doing it. Rather it is a good idea to carefully examine the possible individual use cases for blockchain in the company and the added value to be achieved from it before investing in blockchain technology. Companies should definitely ask what they actually want to achieve with blockchain. Only then will the advantages be obvious:
Integrity and transparency – Hashing makes it impossible to alter data without it being noticed, because every change and attempted change can be tracked.
Reliability – Conversely, decentralization means that there is no longer a single point of failure. That means that an outage of the blockchain is almost impossible.
Speed – The storage, processing and exchange of large volumes of data is possible in real time.
Blockchain is still not a mass market, but the hype phase is over according to Gartner. German blockchain expert Prof. Katarina Adam (PhD Eng.) from the University of Applied Sciences for Engineering and Economics Berlin expects the maturity phase for blockchain, in which mass-market solutions really appear, no earlier than beginning in 2025.
Until then, companies still have some hurdles to overcome. The speed of transactions, at least in public blockchains, is still too low. Furthermore, it is not yet completely clear how blockchain should actually communicate with the ERP systems in companies. The subject of data protection, especially when it comes to smart contracts, is also not yet clarified. In any case, the fact that data in the blockchain cannot be changed or deleted contradicts data protection. Here, companies will have to find solutions first, in order to develop use cases in the second step which will actually skyrocket their business models. But then blockchain will probably be unbeatable. For companies, smart contracts via blockchain are a first use in which investment will pay off.