Like any new technology, blockchain has evolved from an idea, to a market buzzword, and now to a real solution with applications in real business environments. The evolution from an idea to successful application takes time; though blockchain was unveiled as a concept in 1991, organizations are just now beginning to incorporate it into architected applications in their production technologies. As more and more organizations cultivate blockchain environments, one opportunity for innovation seems clear: smart contracts.
Smart contracts are the theoretical and technical rules and policies, coded within the blockchain environment, that govern transactional agreements hosted on a blockchain network. They are built inside blockchain applications or constructed as a stand-alone application that rides on a blockchain network. For a transaction on a blockchain network to take place, a smart contract ensures the policies to execute an exchange of information are satisfied. For example, if a car sales transaction system runs on a blockchain application, rules would be established to constitute a successful transaction involving customer credit checks, profitability threshold, etc. If these rules are not met, such that the customer’s credit history does not meet the requirements, the application would trigger an alert and the transaction attempt would be automatically denied by the parties on the blockchain.
As one can imagine, a smart contract is a crucial enabler or disabler of a blockchain environment. It’s imperative that stakeholders throughout the organization are engaged in constructing smart contracts and determining the proper rules to govern them.
The problem that smart contracts pose to organizations is chiefly a lack of involvement from high-level decision makers and stakeholders. Right now, smart contracts are primarily designed and built by the technical personnel and resources that have first-hand experience developing the blockchain network. Therefore, smart contracts do not garner a lot of oversight, legal sign-off or regulation. Due to their complexity, smart contracts require a great deal of maintenance in terms of engineering expertise. Despite the obstacles facing the widespread adoption of smart contracts, companies must also weigh the advantages when building out their strategic IT roadmap.
One of the primary objectives for adopting blockchain is the push to automate. Smart contracts leverage programming code to automatically execute on an agreed-upon set of results between two parties. This reduces the need for humans to intervene in the contract execution process and allows for the transaction to occur faster than traditional methods. In addition to its time-saving attributes, this automation allows for more precision within the contract. It eliminates errors so common in filing or hand-filled forms as the programming code stipulates how and when the contract should be completed. The benefits of automation are complemented by increased security around the contracts. Because smart contracts are built on a blockchain network, they get encrypted and distributed among nodes.
Similar to other blockchain applications, smart contracts are immutable, which ensures that your information is not lost, changed or stolen without proper permissions. This security is especially useful for guaranteeing the authenticity of copyrighted products, job certificates, titles, deeds and a myriad of other credentials and applications. Today, the advantages of smart contracts are helping drive new innovations in supply chain logistics and automation.
Smart contracts are being used across many industries. In the Utilities industry, smart contracts are efficiently governing the distribution of energy in microgrids. Devices in a microgrid are linked by smart sensors enabled by the internet of things (IoT). These devices monitor energy usage and reduce unneeded energy distribution while generating smart contracts based on the consumer’s real-time usage. Consumers in a microgrid often acquire their energy needs from a local prosumer through a digital transaction. This transaction is usually governed by a smart contract and the transaction is often completed via the exchange of cryptocurrencies.
Currently, certificates known as renewable energy credits (REC) are distributed to renewable sources such as wind and solar producers based on generation estimates and forecasts rather than on actual generation. However, blockchain technology can significantly reduce inaccuracies in REC distribution due to the verification required to take place on a peer-to-peer network and through real-time data reporting.
A microgrid governed by a smart contract is not only efficient, it maintains the physical health of the grid by distributing power based on real-time usage. Traditional energy distribution cannot be delivered based on exact consumption, and it runs the risk of incurring an overvoltage of the grid. An overvoltage occurs when more energy is being pumped into an energy grid than can be used and can cause the grid to shut down.
Although we are currently on the bleeding edge of microgrids and smart contracts, microgrids are a great example of how smart contracts can help govern an agreement between two parties. Because smart contracts use public domain to govern an agreement, limited legal oversight and approval is needed. This creates an opportunity for contracts to be commenced in a more efficient manner with fewer parties involved.
About the authors
Jason is a Consulting Manager on ISG’s Cybersecurity team, where he leads client cybersecurity assessments, supports transformation efforts and advises on systems architecture and design. Jason has extensive experience and recognized certifications in cybersecurity, cloud and Technology Business Management (TBM).
Mike Moore is an Analyst with ISG Sourcing Solutions.