Smart contracts are an emerging technology that could conceivably up-end contract management in the very near future. But what are they?
First proposed by Nick Szabo in 1994, smart contracts are self-executing documents with the terms of the agreement written directly into lines of code.
These contracts render transactions traceable, transparent, verifiable and irreversible by allowing trusted agreements to be entered into by distinct, potentially anonymous parties. Needless to say, they could have a significant impact on the way companies conduct business with partners, suppliers, customers, and employees.
How Smart Contracts Will Change the Way Business Is Conducted
The code and the agreements contained in smart contracts exist across a decentralized blockchain network. Blockchain technologies create a network of smart contracts that exchange terms, events, and information throughout the contract lifecycle, automating many of the tasks that have typically been done manually. These contracts can be coded to talk to each other, exchange data, and update themselves with the most current information. They have the potential to automate much of the post-execution lifecycle of a contract, thereby improving compliance, mitigating risk, and increasing efficiency across the enterprise.
For example, blockchain could be used to manage currency fluctuation in a contract between two companies. Say a contract stipulates terms if a currency fluctuates by more than 5 percent. In this scenario, an enterprise would use a contract management application to place the contract in a blockchain consortium, and the application would then check with an external blockchain oracle (which serves as a trusted source of information) for currency rates. When the triggering currency rate is hit, the blockchain app would create a contract addendum, which would be considered executed by both parties against which future payments could be processed.
When Will Smart Contracts Become the Norm?
The question isn't if smart contracts will reach mainstream adoption, but when. Gartner* reports that this may be five to 10 years away, while other experts believe it may be sooner. Regardless on the exact timeline of smart contracts' adoption, Jack Shaw, Executive Director of The American Blockchain Council, advises businesses to:
- Acquire a clear understanding of the various smart contract initiatives.
- Think about what their products and services might look like in the blockchain world.
- Identify the most relevant uses of blockchain technologies within their organization.
- Use blockchain initiatives as a catalyst to replace obsolete systems and processes.
Blockchain technologies are beginning to transform the way businesses exchange assets, enforce contracts, and share data on a global scale. Smart contracts will allow contracts to self-verify conditions and self-execute payment, with no unnecessary human involvement.
Icertis, the leading provider of enterprise contract management software in the cloud, is focused on the implications of blockchain and smart contracts in contract management and is building tools to allow blockchain technology to extend these transactions throughout the contract lifecycle.
To find out more about how blockchain technology and smart contracts are revolutionizing the way the world does business, download Smart Contracts Are Transforming the Way We Do Business – a Newsletter Featuring Gartner Research today.
* Top 10 Technology Trends for 2017: Blockchain and Distributed Ledgers, Gartner, 2017