Smart Contract Business Drivers: Trusted Contract Writers, Bad Contracts (Blockchain Report Excerpt)
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.
Trusted Contract Writers
Smart contracts are applications that will be impenetrable to most buyers and most actual sellers. Instead of putting your trust in Visa and Amazon, you are placing your trust in someone else entirely, the developer of the contract.
Smart contracts are easily gamed by unscrupulous people who set them up specifically to take advantage of someone else who is less sophisticated. Imagine a templated contract which appears to have a configuration which returns payment for non-delivery, but actually pays one party regardless of what happens. Unless you look at the code and can understand it, you’ll never see that.
And it will frequently be the seller who sets up the templated smart contracts. After all, they are trying to sell stuff and smooth the way for buyers. For larger contracts, there are currently experienced negotiators on both sides and lawyers on both sides making sure that terms and conditions are as favorable as possible. Contracts with a major consultancy, for example, won’t get approved for release by the consultancy’s management or lawyers with net 90 day terms.
In addition to lawyers, smart contracts will need to involve programmers initially. Eventually trusted, sophisticated, and configurable smart contract systems which allow selection of terms and conditions, recognition of third parties and the like will emerge, but it’s early days. Right now, an additional cost for anyone doing this includes paying developers.
Bad Contracts
When a business contract turns out to be bad, there are remedies. There is small claims court, there’s good faith between the buyer and the seller, and there’s value-in-kind agreements and the like. There are ways to make the parties whole enough and typically the money doesn’t just disappear. If one party dies while money is in escrow before delivery of value, there is case law and often boilerplate terms and conditions which cover the situation.
But with smart contracts, it’s possible for the money to go into escrow and never, ever come out. The point of smart contracts is to keep money safe between two parties entering into an agreement. But what if the conditions of the contract aren’t met due to a programming error or just lack of sophistication on the parts of the people entering into the agreement? In that case, the money can go into escrow and stay there forever. Imagine a smart contract that is looking at the wrong variable for the triggering condition, so it never comes. Imagine an external program which fails to put anything into a deliverable entirely. There is nothing inherent in smart contracts that prevents those situations except developers testing programs, and we all know that the history of software is riddled with defects.
These factors will help us determine where smart contracts based on blockchain will shine. There are many cases where the advantages are strongly one-sided. But that doesn’t mean that they have no value or that value won’t emerge.
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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