Smart Contract Sweet Spots: Basic Implications (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.)

Obviously, shorter contracts rather than longer ones are good choices right now with classic escrow cryptocurrency contracts. With the volatility of cryptocurrencies, even one-month contracts have potential risks for both parties. This limits them substantially, but it’s easy to see a future where volatility of one or more major cryptocurrencies comes down to similar levels as fiat currencies so that Herstatt risks are more manageable.

As noted, they aren’t good for mass ecommerce, and even direct exchange of cryptocurrency for immediate delivery of electronically deliverable services or products has its issues. This is another substantial limitation. I can certainly see small software vendors choosing to transact in cryptocurrencies for their software products and hosted services, but it’s still unclear what is in it for most buyers.

Escrow contracts are useful for infrequent transactions which aren’t immediately resolved by ecommerce between entities with little to no history with one another. Where no trust or ongoing business relationship exists, smart contracts will be helpful. This has the potential to be advantageous for larger purchases of services or delivered goods without intermediaries such as Amazon, but it’s unclear how eliminating Amazon from the equation actually improves service or costs for the majority of transactions. Given that it’s possible to buy items worth hundreds of thousands of dollars on Amazon today, it’s unclear what is going to happen in this space.

One clear area where smart contracts have potential is in cross-border purchases of finished goods or raw materials where no business relationship exists. Herstatt risk already applies due to the exchange rates with the foreign seller, although at a lower level of risk. Projecting accounts receivable into a distant country is problematic at best.

This is especially true for purchases from countries with a poor track record for respecting the rule of contractual law. Buying raw materials or finished goods from countries with significant corruption or judicial capture by business or corrupt officials is fraught with risk. Smart contracts could de-risk this significantly.

For transactions within countries with endemic corruption challenges, smart contracts are advantageous as well. If buyers and sellers do not have access to legal recourse, a smart contract’s automatic and inviolable resolution has obvious advantages.

Obviously criminal elements will continue to be happy with cryptocurrencies and will favor smart contracts. They have no means to enforce normal contractual law and typically work in low-trust environments. Smart contracts work for dark web transactions just fine, which explains bitcoin’s dominance in that space.

There aren’t a lot of multi-party agreements where smart contracts won’t add complexity without adding value, but this is an area where smart contracts start to enable disaggregated business value systems. This is a sophisticated space, and there’s likely some gold in there.

Where the buyer has specific additional needs outside of merely the delivery of the goods or services which are measurable, of value, and sellers already agree to penalty clauses for non-delivery, is the current business sweet spot.

The other sweet spot are monopolies. As the sole provider of a good or service, they get to set the terms of the contract much more than the buyers do. It’s an uneven power situation.

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/