How to Implement Smart Contracts: Business Philosophy

19.10.2015

After the advent of cryptocurrencies specialists in business automation engaged in discussions on smart contracts as they deemed them the method to eliminate third parties and reduce operational costs for businesses. It is hardly surprising, because, in fact, a cryptocurrency transaction is particular case of a smart contract recorded in a public register unreservedly transferring a value equivalent from one entity to another.

Actually, any deal may be executed in the form of a smart contract which will to some extent guarantee performance of contractual liabilities to the parties.

Before delving into the reasons why smart contracts have not experienced a widespread adoption yet, it might be useful to see whether business is directed that way, and if so, how it happens. Indeed, market is a kind of a life form where laws of evolution prevail. Particular species of that life form (economic entities) survive due to obtaining specific features from their engineers (founders) providing them with competitive advantages.

If the specialists are right, and smart contracts really provide businesses with all the advantages they talk about, therefore, those species that get equipped with that amazing stuff, must be surviving more effectively, and finally outnumber those who failed to adopt the feature. May this evolutionary process be already launched, but in a form hindering recognition of pure smart contracts?

In order to realize where the species are headed, it may be useful to build up an interpolation of an evolutionary pass from face-to-face deals (synchronicity) to automatic deals via smart contract. Replacing a living arbiter with an automatic arbitration system is an obvious intermediary link within that system: it certainly would reduce costs for arbitration. Here we come to a rather unexpected conclusion:

each separate execution of an algorithm based on automated arbitrage platform in any form is, in fact, a smart contract.

The simplest example known for that matter is deals involving automatic escrow, like those provided for e-Bay purchases.

As those systems have their owner, stability of such smart contracts evidently depends on the parties trust to the owner, and on good will thereof. Therefore, the next obvious step is decentralization of those arbitration systems to make them more resistant against non-intended or intended interference, and to remove the owner from the equation among other things, owners also charge fees for using their arbitration system.

Summarizing the aforementioned trend, one might say that usual synchronous deals between entities acted as the starting point. In order to enhance flexibility and reliability of deals, the entities switched to three-party deals involving an arbiter. At the next stage, the arbiters started automatizing their work by introducing the first prototype of smart contracts. Eventually arbitration systems will be decentralized and owner-less, while deals executed at such platforms will have an honor to be dubbed full-fledged smart contracts.

So, what stops businesses from climbing to the next stage? Of course, there are several reasons for that, both subjective and objective. The former include lack of information, absence of successful examples, and rigidity in embracing new technologies inherent in most people. The latter, however, includes almost complete absence of any decentralized infrastructure to execute smart contracts. Certainly, projects like Ethereum have made a giant leap towards establishment of such infrastructure, but let us face the truth: Ethereum desperately needs apps for a business owner, that could be easily launched on their device, and have a simple and comprehensible interface for conclusion of smart contracts independently, or even during the negotiations. However, none of those apps is available, so presently smart contracts are out of the question.

As soon as the infrastructure issue is covered, business will have to wait for a long while to make sure its reliable, and then proceed with using the system. Moreover, as is known, there are usually two parties to a deal, so both of them will have to know what they are up against. The same problem is there for bitcoins mass adoption. Consumers think: Why do I need that bitcoin if I cant pay with it?, and merchants think: Why do I need bitcoin if none of my customers knows what it is? In order to fill up that serious gap one should create a new information space where entities could send a signal of being ready to employ the new technology. Then the network effect could manifest itself fully.

We could wait until the infrastructure issue is covered, or actively engage ourselves in solving the problem on our own, and eventually find a quite interesting niche at arbitration market. Im sure the most active will choose the second option.

If economic entities can compare to actual life forms, the most interesting stuff may begin when those life forms acquire intelligence and self-consciousness.

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Tags: Business, DAO, Internet of Things, smart contracts