How Smart Contracts can transform enterprises

Updated: Dec 23, 2021


White Paper - Digital Transformation



Find the PDF version of this White Paper below.


Lukas Eichler

Matteo Trulli

Simon Rosental



 

Table of Contents


Introduction

Blockchain

Smart contracts

Definition and Technological Basics of Smart Contract solutions

Key benefits of using Smart Contract solutions

Areas of application of Smart Contracts

Application of Smart Contracts in the Retail Sector

Application of Smart Contracts in the Insurance industry

Application of Smart Contracts in Supply chain management

Conclusion

Bibliography


 

Introduction


Digital transformation is a highly critical matter for companies. Indeed, implementing a sound digital strategy is not only a factor of success but also a condition for survival in any competitive industry. The stakes are high. Since the adoption of computers in the business environment several decades ago, the race to digital innovation has become a continuous priority, and only companies that make good use of new digital technologies manage to remain competitive within their field of activity.

Furthermore, digital transformation is intrinsically linked to major technological upheavals, commonly known as digital revolutions. The history of digital technology has indeed been marked by the appearance of new and profoundly radical technological innovations. For example, Big Data, AI and Machine Learning have deeply marked the technological environment, to take a recent example. Each time, those innovations have had drastic repercussions on companies, allowing for better decision making, faster processes, smarter operations, and improved customer journeys. Those shifts have impacted every aspect of businesses, and each time, only companies that have implemented intelligent solutions have been able to emerge or stay in the race.

Lately, a new digital technology has been created and is emerging as the next digital revolution: blockchain. Keystone of cryptocurrencies, this technology is now finding an increasing number of applications in the business world, drastically improving fields such as finance or supply chain management. The main benefits of this complex, number-based technology are greater transparency, security, and efficiency. Indeed, companies are looking at it closely and some solutions have already seen the light of day. We will take smart contracts as an example, but first of all, let’s take a closer look at what blockchain is.


Blockchain

Blockchain is a technology that allows the recording of information in a public, transparent and secure way. A blockchain can be imagined as a digital record of transactions that is duplicated and distributed across a network of computer systems on the blockchain. Each “block” contains many transactions, and every time a new transaction occurs on the chain, an entry of that transaction is added to every participant’s ledger. The decentralised database managed by multiple participants is known as Distributed Ledger Technology (DLT).

It made its first appearance in the research scenario in 2008, in the context of the Bitcoin initiative. Blockchain was thus used to record transactions and payments. Through this simple recording system, a currency had to be put in as a unit of measure so that parties could do transactions without relying on intermediaries. The blockchain thus was the underlying ledger recording Bitcoin transfers and guaranteeing, by means of cryptographic operations, the authentication and non-repudiation of payments (Euromoney).


Smart contracts


Definition and Technological Basics of Smart Contract solutions


Digital transformation offers far-reaching opportunities to profoundly transform the way business is conducted. Especially emerging blockchain technologies allow solving one of the oldest problems in trade and business in general: the question of trust. In real-world business transactions, the duties of two contract parties are often conditional on each other. This means the willingness of one party to fulfil their contractual obligation depends on the other party’s prior performance. In the past, this was often solved through an escrow. An independent third party received contract instructions from both trading parties, verified certain conditions and executed the exchange when all the requirements were met.

This complicated, expensive and time-consuming process could now be substituted by smart-contract solutions. The smart contract, in this case, would take on the task to administer the contract, supervise the fulfilment of certain terms and securely perform the transaction.

The term smart contract was first coined in the 1960s by the US informatic Nick Szabo, describing the digitised, conditional and automatic execution of contractual terms. In today’s sense, a smart contract is a set of codified logical legal and business terms of an agreement stored on a blockchain. The contract is self-executing, based on certain conditions and external information. Once the transaction is executed, the blockchain is updated and the relevant information cannot be manipulated anymore.

Generally, the functioning of a smart contract can be described through the following simplified framework:

  1. A smart contract is created on the blockchain and linked to certain contractual conditions

  2. A digitally verifiable event is triggered

  3. The smart contract “program” validates the specified conditions

  4. Interfaces can be used to include “real-world data into the verification process through so-called “Oracles”

  5. The smart contract takes further action based on the result of the verification process

For the blockchain to be able to execute the contractual conditions, the contract function needs to be presented in program code in a blockchain-readable format. For instance, this could be the programming language Solidity in order to implement the contract for a suitable blockchain such as Ethereum. Many other smart contract blockchain platforms exist, such as Hyperledger Fabric, Stellar, EOS or NEM. Which platform is most suitable depends on the intended use of the smart contract. Platforms vary in scalability, compatible programming languages or transaction fees.

Users can interact with the smart contract through a public key assigned upon creation. Since the contract itself does not possess a private key, it cannot be altered or manipulated after creation.

Key benefits of using Smart Contract solutions


Smart contracts offer various benefits to smoothen transaction processes and the execution of agreements between parties, especially in regard to speed of execution, accuracy of data, security and protection from manipulation and reduction of legal costs and delays (source):

- Smart Contracts allow to execute and see the result of a transaction almost instantaneously. As they are exclusively digital there is no use for a physical trail and mistakes in the provision and forwarding of information are avoided

- Smart contracts are stored encrypted on a blockchain and connected to previous and subsequent entries on the distributed ledger. Therefore, they are secured from outside influence as well as from manipulation by either of the parties. Furthermore, the data is backed up on all the nodes (devices) in the network. Data loss is therefore practically impossible

- Finally, they eliminate the often massive cost of legal contract management and reduce the delay of executing the contract from days to minutes by eliminating any intermediaries. Moreover, they can automatically trigger next steps in the workflow and thereby further accelerate internal processes


Areas of application of Smart Contracts


Smart contracts can be used in many different sectors. Their applications will be crucial to the good functioning of society in the coming years with areas of application being in:

- Government, to create a voting system completely transparent or verifying politicians’ programs (for verifying if promises made have been kept) or to enable autonomous governance systems

- Intellectual property, to certify the proof of existence and authorship of a document

- Internet, using the immutability of data in a blockchain to reduce censorship but also fake news

- Finance, using the methods used in cryptocurrencies to safely transfer money between parties in a sure way when conditions are met

- Bitcoin

- Ethereum

- Bitcash

- Commerce, using blockchain as a digital ledger to record ownership of goods and unique characteristics of products to reduce the market of counterfeit or stolen items. Smart contracts would also be used to reduce operating costs by reducing labor in menial work such as administration

- Supply chain management

- Insurance

- Internet of Things (IoT), smart contracts could be used to automate communication between connected things. It would also allow for processes to be put in place for things to take action on their own after a set of conditions has been met

- Education, blockchain would allow for the storage of information. Notably a centralised database where qualification of all individuals is certified. This would reduce cases of frauds.



Application of Smart Contracts in the Retail Sector

Smart contracts offer the possibility to make several contractual processes, especially the management of faulty goods, more transparent, agile, and fast.

The recall of goods that are damaged, faulty, or not as agreed is often a tedious task. Smart contracts allow both parties access to real-time data and thereby get a more comprehensive picture of the situation.

To implement a smart contract system in the goods management system of a retail company, the parties would previously agree on basic conditions, quality criteria for the goods and contractual penalties in the case of breach. These conditions will then be saved in the blockchain. During the exchange process, the smart contract takes on the role of an escrow. It receives the payment from the customer before delivery and holds it back. Once the goods have been delivered, an inspection of the incoming goods takes place. The results are forwarded to the contract through an interface. If no complaint is submitted during a fixed period, the payment is forwarded to the supplier. In case of a complaint, the process determines the nature of the complaint and takes the necessary actions to solve that complaint. Disputes arising from a failure to comply with the terms of the contract can be passed on to an arbitration board. With the consent of the supplier, the contractual penalty can then be debited automatically.

This process accelerates dispute resolution and procedural handling significantly and allows both parties a real-time insight into ongoing exchanges, increasing transparency and strengthening trust between vendor and retailer.





Application of Smart Contracts in the Insurance industry

Insurance is a sector in which an application of smart contracts would remediate a broad spectrum of problems and reduce operating costs. Although the application of this technology has not been studied entirely and it is still in the innovation trigger phase, there are already clear advantages that can be grasped if this technology is well implemented.

A smart contract could be applied in the insurance industry in several ways. Firstly, claims processing has always been a long process requiring human work. It would be possible thanks to the application of smart contracts to reduce this workload. A smart contract could encode the rules for enabling the transfer of refund from the company to the insured and also check routine claims if the proper documentation has been sent over. These processes can be applied to multiple branches of insurance such as healthcare, where all details are written down and sent to the insurance directly on a preset template allowing for the processing of structured data.

Later on, with more trained and robust algorithms and Artificial Intelligence, it would be possible for smart contracts to process unstructured data such as photos. This would allow smart contracts to process claims such as car accidents to determine who was in the wrong through direct correlation logical proceedings.



Application of Smart Contracts in Supply chain management

According to IBM and Pharma Portal, up to 30% of all products do not end up at the final patient because of a lack of efficiency in the whole supply chain management. With smart contracts and blockchain it becomes possible to automate the process and have reliable data on shipments. This includes variances in temperature, state of the cargo, times of arrival.

An example of smart contract based supply chain innovation is Sonoco's Pharma Portal, which is powered by IBM blockchain. Pharma Portal strives to improve supply chain management of crucial medications through the tracking of temperature-controlled pharmaceuticals. This increases transparency and reliability for the involved parties.


Conclusion


Blockchain is a new technology that will impact all sectors not only in business but in all parts of life. It will enable secure and transparent information processes. As more and more services, algorithms and smart contracts are built into a blockchain, trust in transactions will increase and allow for a smoother business environment.

Blockchain and smart contracts will change business in such a way that it is impossible to quantify its impact in the coming years. As described in this paper, its numerous applications show the “tip of the iceberg” as business processes become increasingly efficient. As more and more professionals become proficient in blockchain technologies and smart contracts, business processes will become less expensive, trust will increase and transparency as well.

Bibliography


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