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Smart Contract Business Drivers: Speed & Cost Of Transactions (Blockchain Report Excerpt)

The slow speed of transactions means that smart contracts aren’t particularly suitable for e-commerce applications right now. When you pay for something on iTunes, you receive access immediately.

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.)


There are 9 factors which will help to identify the sweet spot for smart contracts:

1. Herstatt risk due to currency volatility
2. Time value of money
3. Speed of transactions
4. Cost of transactions
5. Accounts receivable and default costs
6. Penalty clauses
7. Multiplying parties
8. Trusted contract writers
9. Bad contracts

This article is the latest in a series which digs into each of these 9 factors.

Speed of Transactions

The slow speed of transactions means that smart contracts aren’t particularly suitable for e-commerce applications right now. When you pay for something on iTunes, you receive access immediately. Bitcoin transactions take 10 minutes to process, and Ethereum only features 15 second transaction resolution at best. Neither guarantees a transaction will be in the next block, so it might be hours with Bitcoin if there is a high transaction load for a transaction to clear. And smart contracts will typically feature multiple transactions of various sorts.

Consumers aren’t interested in an extended wait for gratification. This use case would just be a straight payment from wallet to wallet, which is still problematic in many cases due to the speed of transactions. Current cryptocurrencies don’t support the transaction volumes necessary for mass ecommerce solutions today, and possibly never will.

One of the emerging uses of the cryptocurrency and blockchain is in raising capital. Initial coin offerings (ICOs) are increasingly being used to raise capital for cleantech-related ventures. Grid+ went this route instead of an IPO. It sold 39 million tokens with a value of $32 million. It didn’t hit its target of $89 million, but 36% is reasonable. Of course, ether was at $306 on November 12, 2017 when it closed its ICO, and as of January 2018 it was at $812, which means that if they cashed out to USD they would be almost exactly at their initial funding target.

Cost of Transactions

The cost of transactions with cryptocurrency makes it less useful for smaller transactions. Buying a coffee for $3.00 and spending $1.00 for the transaction won’t be acceptable to either the buyer or the seller and neither will be interested in paying it. Merchants pay the credit card transaction costs of 1.5% to 3% out of their thin margins today, but that’s only 4.5 cents to 9 cents on a coffee. 33% won’t fly.

Regardless of anything else, cryptocurrencies are currently unsuitable for smaller retail transactions. Sellers who use the Amazon platform to sell their products today pay about 60 cents for a $10 transaction, so a dollar is a big increase.

For smart contracts, they have to be decent sums and it has to be clear who is paying them. Given the loss of time value of money and Herstatt risk, if I were entering into a smart contract as a buyer, I’d be negotiating to have the seller pay all transaction costs to somewhat even the terms. But it’s unlikely that a lot of templated smart contracts will give buyers that option, as they will be set up by sellers. Yet again, the advantage in this is for the seller, not the buyer.


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/

 
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Written By

is Chief Strategist with TFIE Strategy Inc, co-founder of distnc technologies, and Strategic Advisor and Board Observer for Agora Energy Technologies. He works with startups, existing businesses and investors to identify opportunities for significant bottom line growth and cost takeout in our rapidly transforming world. His published analyses of low-carbon technology and policy have been seen in Forbes, Quartz and the Leonardo di Caprio Foundation site. His work is regularly included in textbooks. Third-party articles on his analyses and interviews have been published in dozens of news sites globally and have reached #1 on Reddit Science. He's available for consulting and speaking engagements, and Board positions.

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