In light of the rapid growth of smart contracts, IT leaders need to understand the roles they can play in enterprise technology.
Smart contracts on blockchain have the potential to streamline certain business processes. Business and IT leaders are looking at early use cases in advertising and healthcare, among others.
But smart contracts also have downsides, including scalability and security issues. Leaders must carefully weigh any potential advantages against the disadvantages.
Smart contracts defined
A smart contract is a self-executing program based on if-then logic. Vending machines provide a good analogy. If someone inserts $2 and presses B4, then the machine dispenses the cookies in the B4 slot. In other words, if the vending machine receives the required item of value, then it performs the requested action.
Smart contracts technically can run on almost any digital platform, but they typically run on blockchain, which is a type of distributed ledger technology. Smart contracts are one of the most popular blockchain use cases, and for many, the term smart contract connotes smart contracts on blockchain.
A smart contract is useful for automating workflows. In a blockchain-based smart contract, an input to an "oracle" triggers an action. The oracle connects the blockchain to real-world events that provide the inputs and outputs for the smart contract.
Scanners and sensors function as hardware oracles. For example, an RFID sensor on a food shipment can send data to a smart contract that then releases payment to the supplier. As another example, an oracle in an IoT device can capture a wide range of useful data that an AI system manages. The AI then uses the data to activate smart contract processes automatically.
Following are some real-world examples of smart contracts and the drawbacks of using them in an enterprise blockchain project.
1. Improving a digital advertising campaign
Smart contracts can potentially help advertisers and publishers build strong relationships. A smart contract could include conditions requiring a publisher to achieve predetermined targets. When an oracle confirms that the publisher has done what it was supposed to do, the smart contract triggers a payment. For example, a clause could stipulate that a social media account with a large following must promote a discount code. When there are 100 legitimate purchases that use the code, the owner of the social media account receives payment. In addition, smart contracts could prevent deceptive tactics like pixel stuffing or publishers overstating the impressions generated by an ad.
2. Building the best customer experience
Smart contracts can cultivate stronger B2C relationships. For example, a shoe brand partnering with a streaming music service offers complimentary subscription time if the consumer creates a playlist to listen to while jogging. A smart contract sends the customer an offer for a discount on new shoes or suggests songs with a similar tempo to add to the playlist.
3. Filling the void in entertainment consumption
Smart contracts on blockchain could improve how consumers interact with their preferred entertainment choices. For example, nonfungible tokens (NFTs) are a type of smart contract that authenticates ownership and streamlines the buying, selling and trading of digital entertainment assets. There is also interest in using smart contracts to pay independent creators such as authors, musicians and filmmakers. Smart contract automation would remove the need for intermediaries to process royalty payments.
4. Eliminating the go-between in financial transactions
Smart contract technology also enables decentralized finance (DeFi), which is most often associated with peer-to-peer transactions using cryptocurrencies like bitcoin and Ethereum's Ether. DeFi smart contracts could reduce the time and cost of settling these transactions. They also show promise in automating manual banking processes traditionally performed by financial institutions, such as evaluating loan eligibility and processing insurance claims.
5. Enhancing the healthcare communication pipeline
Clear communication is critical for both insurers and patients. Storing a patient's chart on a blockchain could potentially cut down on paperwork processing, improve regulatory compliance and simplify information sharing between providers. For example, if a patient needs a medical procedure, a prior authorization request could trigger a smart contract that reviews insurance coverage and releases payment to the provider.
6. Maximizing productivity in human resources
Distributed ledger technology could also automate HR workflows. HR staff often has to confirm employment histories and perform reference checks. Smart contracts could ease onboarding new employees by simplifying these verification tasks. In addition, smart contracts on blockchain could help enforce the terms of employment contracts and process payroll.
7. Boosting security for identity and access management
IT leaders must protect users' digital identities on corporate systems. Paperwork processing for manual identity requests isn't fast enough for a digitally dependent world. Persistent threats like data breaches show the need for new security options. Authenticating users via smart contracts could augment or replace conventional identity management procedures.
8. Elevating relationships in the insurance industry
Insurers and policyholders engage in multifaceted interactions, and the complex verbiage of insurance policies and fraudulent claim submissions by policyholders can sour the relationship. Smart contracts could improve efficiency in processing claims, make it easier for policyholders to switch carriers and foster cooperation between insurers. Smart contracts could also provide early detection of malicious actions.
9. Optimizing supply chain management
Certain parts of supply chain management could particularly benefit from smart contracts and blockchain. Smart contracts could increase the traceability of products and materials and address environmental, social and governance goals at the same time. For example, blockchain applications could track an item's origins as it moves between global supply chains and calculate tariffs in near real time. Some organizations are exploring smart contracts on blockchain as a way to improve efficiency and minimize errors.
10. Making energy distribution more efficient
Opportunities to use blockchain in the energy industry are growing. For example, blockchain software could automate electricity delivery from energy companies to customers. Smart contracts could streamline energy trading by connecting smaller energy producers. They could also certify renewable energy sources. Blockchain's ability to process and record transactions permanently makes its future in the energy industry promising.
8 drawbacks of smart contracts
As with any substantial change in how an organization processes transactions, there are concerns about integrating smart contracts on blockchain into an enterprise ecosystem.
Smart contracts inherit blockchain's strengths, like immutability. However, they also take on blockchain's challenges, such as security and privacy. IT leaders should understand the risks before implementing enterprise blockchain and smart contracts.
Government privacy and security regulation of smart contracts and their underlying blockchain technology so far is minimal. However, more companies are adopting blockchain projects, which means more scrutiny. Creating corporate compliance policies may help mitigate losses due to internal and external threats. Some of the risks include blockchain network attacks, cryptojacking and human incompetence.
2. Data integrity
Using smart contracts to automate data processing could benefit companies that have a huge number of transactions. However, the process is still subject to faulty data input. A bad actor or poorly trained user who misses a step could provide dishonest, invalid or inaccurate data and still trigger the smart contract. Therefore, it's critical to maintain the incoming data's integrity to prevent errors.
3. Logic hacks
One of blockchain technology's strengths is its use of computational logic to move data between nodes. However, hackers are finding ways to target that logic and exploit the interoperability of the software. These attacks are seen primarily in cryptocurrency, but that doesn't mean smart contracts are immune. An unsecure, poorly coded smart contract could potentially expose an entire enterprise blockchain to threats.
It's challenging for public blockchain technology to scale well, in part because the blockchain must be able to sustain many transactions simultaneously. Such demands increase the workload between nodes, requiring significant amounts of computing power, electricity and bandwidth. Sharding, a type of data partitioning, and proof-of-stake blockchain consensus algorithms show promise in mitigating this drawback.
The blockchain technology behind smart contracts improves as more companies add them to their ecosystems. However, there are security risks if the smart contracts are poorly coded or inadequately maintained. The essential step of establishing a governance model could help organizations stay ahead of these challenges.
One advantage an enterprise (private) blockchain has over a public blockchain is that only approved users can interact with the data. They can come from outside companies whose data collection and processing standards may not translate well -- if at all -- in the B2B relationship. A well-coded smart contract can eliminate these data disparities to ensure smooth transactions while strengthening business communication.
Public blockchains have massive carbon footprints, but companies are exploring ways to reduce their environmental impact, and technology leaders concerned about sustainability should be aware of these options. An enterprise blockchain tends to use fewer computational resources than a public blockchain, and careful maintenance can help keep it that way.
The nature of a shared ledger means multiple parties have access to the data, potentially opening an organization to bad actors and other vulnerabilities. The extent of the threat usually depends on the permission levels of the blockchain that stores the smart contract. Hiring blockchain developers could help avoid potential issues. In-house developers can conduct audits, use trusted third parties to perform penetration tests and consistently evaluate security.