Smart Contracts on a Blockchain — This New Technology is Impacting Multiple Business Sectors
By Jesse Rivera, CEO at New Vista Solutions
It’s hard to find a business article or financial newsletter these days that isn’t talking about blockchain technology and how it’s going to change the way we do business around the world. Most of us are still trying to wrap our heads around how the blockchain works and why it’s getting so much attention.
We know blockchain is the innovative technology behind the distribution and exchange of Bitcoin and other digital currencies, but how is that same technology being applied to so many other business sectors that have nothing to do with currency? First, let’s take a look at the basic definition of blockchain and how it actually works.
A blockchain is a constantly growing ledger that keeps a permanent record of all the transactions submitted in a secure, chronological database that’s distributed to a network of computers called ‘nodes’. Each transaction is peer-to-peer. No third party (like a bank or attorney) is needed. Trust in the accuracy of the data is established by cryptography, collaboration, coding and consensus within the network — not by intermediaries like banks or governments. Once recorded on the network, a transaction can’t be changed or removed.
Every transaction submitted to the blockchain is added to a ‘block’ of data that must be verified by the network before being permanently added to the database. Each block is linked to the block that precedes it and the one that follows it using cryptography, so the transaction becomes part of a chain that grows with each transaction added.
There are different ways to verify transactions depending on the protocol used to build the blockchain, but the end result is the same — the creation of a permanent record that can’t be successfully hacked because it resides on a network of computers. Any attempt to manipulate the data would quickly be noticed before any damage could be done.
Now, let’s talk about what a ‘transaction’ could look like. In the Bitcoin blockchain, a transaction is currency changing hands. The sender, receiver, amount and a timestamp are recorded with each transaction. Pretty straight forward.
What if the transaction involves an agreement between two or more parties with terms and conditions that include actionable items along a specific timeline? That was the idea behind the creation of Ethereum in July 2015, the second largest blockchain and cryptocurrency after Bitcoin.
This type of transaction is called a ‘smart contract’. The term was first introduced in 1994 by a computer scientist named Nick Szabo, but the technology to make it work on a global scale didn’t exist until blockchain technology came along.
Smart contracts are built around a set of programmed instructions that work on the ‘If this, then that’ premise which looks for action to be taken when certain conditions are met. Ethereum isn’t the only blockchain that can accommodate smart contracts, but it’s the largest and the most advanced platform used for coding and processing this type of transaction.
There are no intermediaries involved in a smart contract. No lawyers, brokers or trustees. And no one can manipulate the terms once the data is recorded on the ledger. There’s no time spent on manual data entry or paper shuffling, so money is saved and human error is removed from the equation.
Let’s take a look at some examples of smart contracts in real-life business situations:
Supply Chain and Logistics Management
Managing all the moving parts of creating and distributing goods around the globe is extremely complex. Depending on the product, a supply chain can include many stages with multiple international locations and mountains of paperwork. Current supply chain processes are often slow, inefficient and difficult to investigate when unethical practices are suspected.
Smart contracts on the blockchain bring reliability and efficiency to the supply chain industry. Each step along the way is verified and recorded, and everyone on the chain can see exactly where the product is located — no disputes and no manual paperwork. And since blockchains allow the transfer of digital currency anywhere in the world without the involvement of a banking institution, international suppliers can be paid immediately when certain conditions in the smart contract are met.
IBM has joined Maersk Line, the largest container ship operator in the world based in Denmark, to build a blockchain they believe will revolutionize the global shipping industry.
The food industry is using blockchain and smart contracts to track food products from source to market. Walmart, Nestle, Tyson and Dole are using this technology to keep tabs on where their products are sourced, processed and stored prior to receiving them.
De Beers Group, which mines and markets over 30% of the world’s diamond supply, is developing a blockchain to track stones from the mining source all the way to the retail market. They believe this will help eradicate the sale of conflict diamonds, also known as ‘blood diamonds’.
The financial sector is hyper-focused on saving time and money with blockchain technology. JP Morgan Chase used the Ethereum blockchain platform to build its own digital ledger called Quorum. Their website states, “Quorum is ideal for any application requiring high speed and high throughput processing of private transactions within a permissioned group of known participants. Quorum addresses specific challenges to blockchain technology adoption within the financial industry, and beyond”.
Although there are still some challenges to be worked out, there is no shortage of research and collaboration going on behind the scenes as financial institutions plan for what is sure to be a paradigm shift in their industry.
Real Estate Transactions
Anyone who has bought or sold real estate knows how tedious and time consuming that process can be. Identity and income verification for mortgage applications, title searches, property inspections and appraisals — the list goes on.
Imagine a peer-to-peer transaction that takes days instead of weeks to close. Although that concept is in its infancy, some speculate that we’re headed in that direction.
The cumbersome task of searching through title records is a good example of how blockchain could be applied. A blockchain-based digital identity of a property might include its location, ownership history and title transfer details. When that data is stored on a tamper-proof digital ledger, the trust factor is elevated and the need for insurance is minimized or eliminated altogether.
Rob Massey, partner and blockchain authority at Deloitte Tax LLP stated, “This increased security and transparency [of blockchain] may mitigate title-fraud risk and reduce costs by simplifying the title check process.”
Rising costs and patient information security are key concerns within our healthcare system in the U.S. Protecting the privacy of individuals’ healthcare records is a costly and complicated task, but smart contract technology might be the solution.
BIS Research, a firm that specializes in providing market intelligence for emerging technologies, recently reported that blockchain in healthcare is projected to be a $5.61 billion industry by the end of 2025. The report also estimates that 14 percent of healthcare organizations in the U.S. will have a blockchain system in place by the end of 2018 — primarily due to the “urgent need to improve interoperability and security of the healthcare information systems”.
With smart contract technology built on a blockchain, personal health records could be encrypted and stored with a private key, which would limit access to certain individuals.
Adherence to privacy laws, like HIPAA (Health Insurance Portability and Accountability Act of 1996), could be closely monitored. Post-surgery proof-of-delivery and billing records could be recorded and automatically sent to insurance providers. Lab test results, prescription history, physician’s notes — all could be accessible to a permission-based group of participants in the blockchain.
The Internet of Things (IoT)
The Internet of Things refers to the billions of physical devices (“things”) that are now connected to the Internet. Think driverless cars, drones, delivered packages, smart watches. Thanks to cheap computer processors and wireless connections, just about anything can be connected to the Internet to collect data, update software and provide information to the world’s consumer population.
Kevin Ashton, a British technology pioneer, first coined the phrase in 1999, but the technology wasn’t up to speed until ten years later. Now, we have apps on our smart phones that control light bulbs, thermostats and home security systems. Smart home devices like Amazon Echo, smart plugs and smart appliances — all are becoming a fundamental part of our daily lives.
Thanks to IoT sensors, manufacturers are gathering a vast amount of data that can show how their products are working in the marketplace, but there’s one problem — consumer privacy. With all those sensors listening in on everything we do, our privacy is at risk.
Enter blockchain technology — big business is looking at digital ledgers as a solution to IoT security. In September, 2017, a number of industry giants (Cisco, Bosch, BNY Mellon, U.S. Bank and Gemalto to name a few) announced the formation of the Trusted IoT Alliance, a consortium whose mission is to develop an open source blockchain protocol to support IoT technology in major industries worldwide.
So, smart contracts and blockchain are the future. To what extent, we don’t yet know. As businesses around the world learn more about how this technology can improve their bottom line, it’s a sure bet there are more changes to come. And despite the notable technological advancements we’ve all witnessed in the past two decades — with blockchain, it seems like we’re just getting started.
Jesse Rivera is CEO at New Vista Solutions, a leading provider of settlement solution services to the mortgage industry. For more articles and information about NVS, visit NewVistaSolutions.com.