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The Capital

Smart Contracts In B2B Transactions

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Business contracts as contracts that have certain features in terms of the conclusion, execution, termination, grounds, and procedure for bringing to civil liability, have repeatedly become the object of various scientific discussions. The subject matter of the agreement, in which only business entities participate — commercial legal entities, individual entrepreneurs, non-commercial legal entities engaged in entrepreneurial activity, predetermined a special scientific and practical interest in such transactions.

Recent changes in the economy and social sphere of society have confirmed the need for further improvement of approaches to business contracts. Among them, the most important is the need for the greatest possible informatization. The modern business actively uses tools such as blockchain, tokens, cryptocurrencies, which allows it to achieve maximum profit.

The coronavirus situation since the beginning of 2020 has led to new problems in the theory and practice of civil law. The widespread quarantine and self-isolation have clearly shown how relevant and vital for business are tools for automatic fulfillment of obligations, other use of modern technologies for concluding contracts, as well as making transactions. Among such tools, smart contracts and other technologies that ensure the automatic fulfillment of obligations occupy a special place.

The emergence and mass adoption of the Internet in the 1990s. fundamentally changed the commerce of business. Instant communication and data flow allowed a large number of buyers and sellers to be connected on electronic marketplaces. These new B2B transaction platforms have reduced transaction costs, improved customer accessibility, and improved liquidity and scalability.

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In general, the use of new technology for doing business on the Internet has brought economic benefits to all stakeholders in the inter-enterprise environment.

For the electronic B2B marketplace to function, it must rely on an intermediary (market maker) who brings together multiple buyers and sellers to facilitate transactions. Because trust is fundamental to relationships in B2B markets in general, and in B2B electronic markets in particular, the market maker acts as a trusted third party that protects against fraud and abuse of trust among market participants. In addition, it maintains a register of transactions recorded on the server system and ensures the integrity of that system. The market maker charges a transaction fee to cover its operating costs (computer equipment, personnel, etc.) and depends on interbank payment networks to conduct domestic and international transactions.

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Since a market maker controls the infrastructure, information flows, and processes that regulate the electronic market, his actions may be contrary to the interests of other market participants. For example, he may engage in an exchange on the buyer’s or seller’s side, using valuable information about the current state of the market, and trade opportunistically against other parties. In addition, he can manipulate the market rules to his advantage or allow other market players to abuse the system.

Another problem is that, by their very nature, electronic markets can be biased towards sellers or buyers and therefore less attractive to both parties. Likewise, suppliers may want to abuse established quality procedures and opportunistically sell products of inferior quality than those for which they are contracted.

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Taken together, this suggests that the electronic marketplace is dependent on a model based on trust, which can break if the market maker turns out to be unreliable.

Among the most well-known platforms for making B2B transactions are blockchain. The recent development of Internet-powered blockchain technology promises a wide range of benefits that complement and go beyond those introduced by the B2B e-marketplaces that emerged at the turn of the century. Let’s take a closer look at blockchain technology in the context of its role for business and B2B transactions.

The blockchain is powered by a complex reward mechanism built into the system. In order for a transaction to be written to a block, the nodes must check if the transaction is legitimate. In particular, nodes must ensure that the requested electronic payment has occurred and ownership of the currency has been transferred. Once the nodes ensure that the transactions are legal and validate the block, they are rewarded in cash (cryptocurrency). The reward scheme encourages nodes to process transactions on the blockchain, creating competition between them, since only the first node that validates the block receives the reward.

Validating a transaction takes the form of trial and error seeking a randomized solution to a computational puzzle. Therefore, if each node has the same processing power, it has an equal chance of solving the puzzle and getting rewarded.

Here is a real case of the implementation of blockchain technology in B2B relations. Shipping giant UPS in the United States has announced a new blockchain integration aimed at bringing inter-enterprise (B2B) sales to the digital age. UPS has signed an agreement with e-commerce company Inxeption to develop a blockchain-powered platform to facilitate cross-enterprise sales. A platform called Inxeption Zippy (Inxeption Corporation) is meant to act as an online directory for businesses.

Service integration aims to attract more B2B sellers to e-commerce as the slow adoption of online selling resources directly impacts businesses that use traditional methods of selling and advertising.

To help customers migrate to the digital platform, the platform guides sellers through a step-by-step process of setting up an online website for a company, listing its products, and selling to other businesses using contract prices.

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There are many other promising avenues for using blockchain for B2B transactions. Ethereum is considered the second generation blockchain since, in addition to a decentralized system of electronic currencies with its own cryptocurrency (ether), it provides an embedded programming language. This feature, which is not fully available on the bitcoin blockchain, allows the creation of smart contracts that can be defined as computer applications with different terms and conditions, customized to individual needs, and self-executed if pre-programmed conditions are met.

There are decentralized exchanges between businesses as electronic trading platforms where transactions are verified on the blockchain-based on conditional smart contracts using cryptocurrency as a means of payment. The term “exchange” refers to all kinds of pricing mechanisms, including auctions, reverse auctions, supply and demand systems, and others. As discussed below, decentralized B2B exchanges based on cryptocurrencies solve long-standing problems inherent in the current form of electronic marketplaces that are associated with trust, opportunism among the participants in the transaction, rejection of quality, market liquidity, transaction costs, and the speed and safety of the payment process.

Technically, a decentralized B2B exchange can be seen as a set of smart contracts interacting with each other to optimize a well-defined objective function in accordance with predefined transaction conditions. The contracts coded using the programming language are completely transparent, verifiable, and constantly recorded on the blockchain. The development and operation of contracts can be achieved with minimal costs, several orders of magnitude lower than the costs of operating computer servers and personnel in traditional online markets.

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A study by consulting company Accenture found banks could save up to $ 12 billion a year if they use smart contracts.

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This conclusion only suggests that participants in B2B relationships can benefit from the use of smart contracts and blockchain technology in the following aspects.

  1. Speed ​​and Real-Time Updates — Smart contracts use software codes to automate processes and tasks that are often performed physically by manual means, resulting in increased speed of various business processes.
  2. Accuracy. Automation not only increases speed but also reduces human error to a significant level since execution is done by the Web and not by any separate party. Smart contracts and blockchain technology offer decentralized processes for execution.
  3. Presence of the presence in legal relations of a smaller number of intermediaries.
  4. Reduced costs. Since smart contracts and blockchain require less human intervention as well as third-party intermediaries, they significantly reduce operating costs.
  5. New operating models — due to the cheap way of entering into and operating a smart contract — new types of business and models will definitely appear. For example, automatic access to vehicles.

Consider the options for B2B companies to benefit from smart contracts.

1. Ordered transaction processes.

Smart contracts can help streamline the transaction processes in B2B companies. For example, smart contracts and blockchain can be used to innovatively transfer digital products from one company to another by automatically executing a transaction. In fact, smart contracts will improve the facilitation of the transfer of physical goods from one business organization to another.

2. Unique identification.

Bitcoin is a real-world example of the benefits of blockchain for unique identification. Identity verification has become one of the challenges many companies face in the face of the rise in fraud. Smart contracts can help prove the identity of every person in the world, as they share one common ledger. This is especially important when the primary data entered into the system are to be identified. Identity smart contracts have made digital titles possible.

In addition to using blockchain and smart contracts to verify identity, B2B companies can use them to equip their products with a unified tracking system. This can help them accurately distinguish genuine from counterfeit products. This can significantly reduce supplier support fraud.

3. Big data and process efficiency.

As B2B actors are now operating in the information age, there is a huge amount of data that needs to be analyzed, inferred, and interpreted for B2B companies to make informed decisions. Smart contracts and blockchain automate this process and therefore make it more efficient and effective in providing the necessary data management.

In terms of entrepreneurship, according to a McKinsey & Company report, the use of blockchain technology and smart contracts can significantly reduce the cost of B2B transactions. According to the company, the business sector will be able to save about 50 billion by 2021. And the use of smart contracts will replace intermediaries in such areas as banking services, escrow services, notaries, and in some cases even legal services. At the same time, in the field of management, smart contracts will allow managers to manage work processes more efficiently. For example, automatically accrue bonuses to employees when certain goals are achieved or pay for the services of third-party contractors.

Thus, smart contracts can be effectively applied in various areas of B2B transactions. Among them are financial services; technologies, media sphere, communications, distribution of royalties to authors; power supply; government sector; accounting, accounting, office work; intersectoral sector; voting, peer-to-peer transactions (P2P), tracking the history of the origin of a particular product.

Based on the foregoing, we can draw the following conclusions that can be used for further research on smart contracts.

  1. For the electronic marketplace for B2B transactions to function, it must rely on an intermediary (market maker) who brings together several buyers and sellers to facilitate transactions. To effectively use smart contracts and reduce legal risks in a number of areas, for example, electronic exchange trading, the legal status of this subject should be established, defining it either as an intermediary with special rights and obligations or as an independent subject of civil and business relations.
  2. Participants in B2B relations can benefit from the use of smart contracts and blockchain technology in the following aspects: speed and real-time updates; accuracy; the presence of a smaller number of intermediaries in legal relations; cost reduction; new operating models.
  3. The most profitable areas for B2B companies to benefit from smart contracts: streamlined transaction processes; unique identification; big data and process efficiency. Smart contracts can be effectively applied in a wide variety of B2B business areas. Among them are financial services; technologies, media sphere, communications, distribution of royalties to authors; power supply; government sector; accounting, accounting, office work; intersectoral sector; voting, peer-to-peer transactions (P2P), tracking the history of the origin of a particular product.
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