Three Ways That Smart Contracts Will Change the Way You Do Business
The Smart Contract is a (relatively) new type of software that will soon transform the way that you enter into, manage and think about agreements — whether you are a pension fund buying a million shares of stock, or a freelancer designing a logo for a client on the other side of the world, or a consumer who wants to verify where and how the beans in your fair trade coffee were grown,or a bank financing a mortgage on a new home.
The core idea of the Smart Contract is that it is software that stands between the parties to a deal. Both parties agree to give the software the authority to manage some or all of the contract, for example to transfer funds from buyer to seller once the software verifies delivery. By giving up some of their autonomy to the software, they open up new possibilities for beneficial transactions.
You Can Trust Me, I’m a Computer Program
But why on earth would you want to give a software program — that you don’t completely control — access to your bank account? The answer is that by doing so you can (1) enter into deals that would otherwise be impossible (2) slash your costs and cut down on mistakes and (3) unlock innovation to create new kinds of business relationships that as of now we can barely imagine.
Giving up partial control to the software is a feature not a bug, if you remember that you are doing so in exchange for other party giving up partial control too. This means that, even if the buyer and seller don’t completely trust each other — in fact even if they don’t know each other — they can do a deal so long as they trust the software. The Smart Contract is software that will make sure that each one of you will hold up your end of the deal.
Smart Contracts on the Move
You can think of a Smart Contract as an autonomous software agent that is jointly programmed by the parties. Once they agree on the instructions for the Smart Contract — say to transfer money from the buyer’s account to the seller’s account upon delivery of a product is verified by an rfid tag — from there on the Smart Contract takes over. The Smart Contract acts on its own to “complete its mission,” i.e. to complete the deal.
Say Matt the Mover needs to rent a pickup truck for the day. Meanwhile Tara the Truck owner would like to make extra income from her truck. Matt wants a reliable truck at a reasonable price and wants to make sure he won’t get nickeled and dimed. Tara wants to make sure she gets paid, and that she will get her truck back in good working order.
Matt and Tara don’t know each other, but let’s say they connect through a marketplace call it (in this hypothetical world) “eTruckBay” or “AirTruckNTruck”. And once they connect, they enter into a Smart Contract with each other.
They agree on a Smart Contract that sets the rate for the day, and also a rate for excess mileage, and a rate for excess weight, and where Matt is going to pick up the truck and where he is going to drop it off. When Matt arrives, the Smart Contract verifies that his deposit went through to Tara’s account and verifies that his insurance is up to date. The Smart Contract unlocks the door and the ignition. Matt drives off to move the furniture for the day. Turns out that he has to drive further than he intended, but that’s no problem because the Smart Contract calculates the extra charges based on the pre-arranged mileage rate. Also, it turns out that on one of his trips he had to carry a heavier load than usual. But that’s also no problem because the Smart Contract adjusts the balance due based on the pre-arranged fee for the excess weight. At the end of the day he returns the truck to the lot, and the Smart Contract verifies that he re-filled the gas tank. The balance due is automatically transferred from Matt’s Account to Tara’s. Just to add a wrinkle, let’s say that Matt got a parking ticket at some point. That gets handled through the Smart Contract too.
The Three Benefits of Smart Contracts
Now, you are not going to be renting a truck using a Smart Contract next week or even next year, but they are coming. And this hypothetical illustrates three of the main benefits that Smart Contracts will bring.
- Smart Contracts build trust;
- Smart Contracts slash costs and errors; and
- Smart Contracts unlock innovation to allow for new types of transactions.
First, At the beginning of our story, Matt and Tara don’t know each other and they certainly have no basis to trust each other. But, so long as they trust the Smart Contract, then they can enter into a deal.
Second, beyond simply entering the deal, the Smart Contract also helps by taking care of all the calculations and overhead of managing the deal. So long as both Matt and Tara trust it to calculate, say, the excess mileage, then they can leave that to the Smart Contract.
Third, the Smart Contract creates the possibility for an entirely new type of transaction. In this hypothetical, it was an extension of the a sharing economy transaction. Just as AirBnB creates new types of opportunities for home rentals, in this case our hypothetical Smart Contract created a new possibility for truck sharing. And our imagination is really the only limit to the types of transactions that the Smart Contract could facilitate.