Using Smart Contracts to Optimize Business Processes
Analyzing how blockchain can change business-to-business transactions
From Wall Street’s biggest banks to governments across the world, blockchain is slowly being adopted to solve different business-critical problems. Smart contracts are at the epicenter of this blockchain revolution. From building your own business to creating contracts for business deals, payments, and accounting, smart contracts bring forth different opportunities to streamline business processes across industries.
Smart contracts are encoded agreements that can improve the way businesses function and interact with each other. They are also significantly more cost-effective than comparable conventional solutions.
In this article, let’s examine how blockchain technology and smart contracts can be used for optimizing various business processes:
Smart contracts for supply chain management and B2B deals
Smart contracts are self-executing bits of computer code that can facilitate, verify, and enforce the performance of an agreement. Unlike traditional computer programs, smart contracts are immutable and irreversible. They can be applied in many different business and legal contexts as a result.
For example, let’s say a smart contract is created for an export deal between two entities. This smart contract starts when the exporting entity readies the goods for shipment. At every step of the process — for example shipment pickup, shipment arrival, and delivery — the smart contract requires a signoff from the respective stakeholders. Once the smart contract has been signed by all involved parties, it automatically releases the agreed-upon payment to the parties involved, such as the goods and services provider and the logistics service. The payment is sent to their crypto wallets for added transparency and security.
Such a mechanism not only streamlines the entire supply chain process for business-to-business deals, but also creates an audit trail that auditors or regulators can examine to ensure that all rules were followed.
Smart contracts for reconciliation and dispute resolution
In business interactions, disputes happen because involved parties interpret a contract based on their own understanding. And since there’s no bipartisan intermediary, these disputes often escalate all the way to court.
Smart contracts are based on a set of rules that the involved parties agreed on and, as mentioned above, require a signoff from the respective parties at each stage. Furthermore, a smart contract is one single, immutable record. Every modification to the smart contract transaction record is immediately visible to all participants. This complete, real-time transparency creates an unassailable audit trail. Though a party involved can add an update to the transaction record, they can’t alter or erase the record.
When a dispute happens and there’s a discrepancy, the smart contract synthesizes the data in order to identify the source of that discrepancy and comes to an agreement. Considering that this happens on-chain, all involved parties can see the analysis and how the smart contract reached a consensus. The final decision is then sent to all involved parties for their signoff. Furthermore, all information, discrepancies, and resulting decisions are stored on-chain for any future audit or reference.
Blockchain-enabled accounting
The existing business ecosystem is supported by double-entry accounting or bookkeeping. Double-entry accounting requires a two-sided accounting entry to maintain financial data, meaning that every input to an account must have a matching and opposing entry to another account.
An equation for balancing the books is the cornerstone of double-entry bookkeeping. The accounting equation serves as a tool for identifying errors; if at any moment the sum of all debits for all accounts does not equal the sum of all credits for all accounts, it is considered an error. However, even if one entry is fake, the ledger can still be presented as being “balanced” as long as the equation is met. That is considered double-entry accounting’s worst flaw.
In contrast, when transactions are processed on the blockchain, this issue of adding fraudulent transactions is solved automatically. In blockchain-enabled accounting, transactions are recorded in chronological order and hosted on-chain, so the record is permanent. Any change will be recorded as a separate transaction.
All the steps of a business transaction are executed through smart contracts that come with required signoffs. Given that the entire deal, including payments, is on-chain, neither party can modify anything and the record is permanently available for review. This record further creates a connection between the internal records of all the stakeholders involved, making them less prone to errors and fraud, but instead verifiable through an easy audit trail on-chain. This is known as triple-entry accounting.
Learn more about triple-entry accounting in our recent blog.
Is Cardstack building a solution that can help businesses optimize operations?
Cardstack is building an end-to-end payments solution for businesses that will allow them to manage invoices, pay vendors, and do accounting — all through one dashboard!
Want to learn more about our end-to-end payments solution and what we’re building? Drop us a line at communications@cardstack.com.
This article is about smart contracts. Read more about the future of blockchain technology below.
How Blockchain-Enabled Reconciliation Streamlines Accounting
Fixing Data Privacy with Web3 Tools
