Published on October 13th, 2018 | by Michael Barnard0
Smart Contract Business Underpinning (Blockchain Report Excerpt)
October 13th, 2018 by Michael Barnard
Along with our regular daily clean tech news coverage, CleanTechnica also produces in-depth reports on various aspects of clean energy and clean transport. One of the emerging technologies we cover that isn’t directly a clean tech innovation is blockchain, which promises to be a catalyst for innovation in the green economy in the very near future. Blockchain is probably most widely known to the public as “having something to do with cryptocurrency and Bitcoin, right?,” which is partially correct, but the technology itself has a wide range of applications, some of which will be crucial in the fields of distributed renewable energy, grid management and energy storage, and smart contracts, among others.
The full report Blockchain – An Innovation Enabler for Clean Technology, which was published in July, is a deep dive into blockchain and its potential, and we will be posting more excerpts from the report over the coming weeks. (Read the last installment here.)
A smart contract that involves contracting a payment for services to be rendered or a product to be delivered involves three separate accounts: a purchaser, a seller, and an escrow account. Escrow is a means of creating trust in a contract where there is none. In an escrow situation, a third party holds something of value from the purchaser until a certain condition is met by the seller, at which time they deliver the thing of value to the purchaser.
As an example: Jill wants to sell her guitar. Bob wants to buy it and is willing to pay $500 for it. Jill and Bob don’t know one another. They agree that they both trust John to hold the money until the guitar gets to Bob. Bob uses email money transfer to send $500 to John. When the guitar is delivered, Bob texts John that it has arrived and it’s as advertised. John uses email money transfer to send the $500 to Jill. If the guitar never arrives, then Bob gets his money back. Obviously, there are details missing in this simple example — such as delivery fees, transaction fees, a fee for John for his trouble, and a security measure to ensure that Bob doesn’t lie about not receiving the guitar, but that’s the basic idea.
In cryptocurrencies, the purchaser and seller accounts are called wallets, and typically the contract itself acts as an escrow account. I won’t bother stepping through the code and nuances, but those who are interested can look at this Ethereum example. The business implications are more interesting and will be explored in the next section.
The example above lists some missing details that smart contracts have to enable. Delivery fees to a delivery organization such as DHL or UPS have to be managed, and can be managed by adding the organization as another party to the smart contract if they have a wallet. Transaction fees start to abound in this model, as every shifting of coin is a transaction with a cost, such as Ethereum’s range of $0.50 to $1.50.
Intermediary cryptocurrency payment services have sprung up globally, allowing you to pay multiple types of bills including electrical utility bills from your electronic wallet. Examples include Bylls in Canada, Volabit in Mexico, and Paybill in Malaysia and Pakistan. These services take a transaction fee to pay the bills on your behalf. While cryptocurrencies and blockchain advocates tend to assert that they are removing bank intermediaries and their transaction fees from processes, the reality is that new intermediaries with other fees have simply sprung up, a common pattern across the space.
The escrow cost is the additional cost of moving the coin into the escrow-holding contract, which will be a lot lower than third-party escrow costs. For home sales in California, there are typically base costs of $175 to $250 plus $1.75 to $2.50 per thousand of the purchase price. For a $300,000 condo, that would mean $700 to $1,000 of fees to the escrow agent as well as any banking transaction fees. If that were transacted through Ethereum solely in ether, the escrow cost would be around a dollar.
What smart contracts don’t really support are typical payment terms, such as net 30 (which means payment of the net amount is due 30 days after receipt of invoice or bill). This is a very typical contractual type and we all have them with our cell phone providers, our electrical utilities, and the like. They are fundamental to most service delivery offerings. They are also fundamental to most delivery of goods for business purposes. Electronic commerce has trained us to think of delivered goods as being paid for at the time of order, but in business goods, delivery is contracted with more sophisticated payment terms. Frequently, ongoing order contracts for things such as natural gas for a combined-cycle gas generation plant are based on monthly delivery volume with month-end invoicing and net 30 terms.
Stay tuned for more excerpts from Blockchain – An Innovation Enabler for Clean Technology, or view the summary and request the full report at https://products.cleantechnica.com/reports/