As technology evolves and certain trends emerge, Inno will frequently tap experts within the Atlanta community to break down a particular topic. For this week’s Community Insight, we’re going to look at smart contracts and how blockchain is facilitating, verifying, and enforcing the negotiation of a contract.
For businesses utilizing repeating, regular transactions – think banking, health care and supply chain – automated smart contracts add security, efficiency and savings. A smart contract is a streamlined software program that seamlessly performs each party’s contractual obligation in an “if-then” format while taking advantage of blockchain’s decentralized verification system. Rather than have an employee or third party manually perform each transaction, a smart contract automatically performs when each party’s condition is completed.
The benefits of smart contracts over standard contracts are threefold: they are more secure than standard contracts due to the blockchain technology, and more efficient and cost effective than using multiple standard contracts due to the elimination of oversight requirements and manual error. Automated transactions ultimately give business leaders more time and money to invest in growing their businesses.
Smart contracts are more secure
In simple terms, the blockchain is a ledger. Every computer on the system has their own version of the ledger, and new data is only accepted if everyone’s ledger shows the same thing. Because the ledger is shared by all users, change requires consensus. This makes the blockchain extremely difficult, if near impossible, to hack. Put another way, a smart contract using blockchain technology is secure because it validates and authenticates transactions within a decentralized system using consensus-based validation. This format eliminates the extra work required by double-entry bookkeeping systems. Soon, companies will use the distributed ledger blockchain technology to avoid the inefficiency of double-entry ledgers. Finance departments can use blockchain to avoid reconciling intercompany accounts, or to facilitate financing. Accounting and transactions can be both more secure and more efficient.
Smart contracts are more efficient
Imagine a world where a vending machine was operated manually by an employee – when you hand the employee a dollar, they reach into the vending machine and grab your soda. Smart contracts, at their most basic level, bypass that employee by automating the process. Many companies currently rely on physical documents or manual performance to complete transactions, leading to delays and inefficiencies while increasing the probability of errors and fraud. A smart contract bypasses these inefficiencies and seamlessly produces the next action. Unlike manual labor, it always produces the right soda, efficiently, with no oversight required.
Not only would it be horribly inefficient to have a vending machine operated by an employee, it would be extremely slow. The computer within the machine is much faster due to automatic performance. Similarly, smart contracts in businesses automatically perform tasks that were previously done manually. Thus, they are much faster.
Smart contracts are more cost effective
By utilizing algorithms and protocols to efficiently establish contracts, cost savings are realized in terms of human capital. Additionally, the chance for expensive or disastrous errors are reduced – potentially saving millions down the line.
High up-front costs and first-in-time difficulties of the new technology are possible challenges for savvy business leaders when implementing smart contracts. Changing an entire system requires investment. However, failing to implement these technologies could be a costly risk in the long run. Companies should take the time to consider whether their company could benefit from the use of smart contracts, and then determine the best plan for adapting the new technology.
Gregg M. Jacobson is an attorney in the Commercial Litigation and Construction practices at Chamberlain Hrdlicka (Atlanta), focusing on issues relating to business formation, contract drafting and interpretation, breach of contract, delay and extra work claims, and other commercial matters. Contact him at firstname.lastname@example.org