With smart contracts’ rapid growth, IT leaders should understand the role those contracts could play within an enterprise technology ecosystem.
Smart contracts on blockchain have the potential to streamline certain business processes and some business and IT leaders are looking at the potential use cases, such as in the area of advertising and healthcare. But smart contracts also have downsides, including scalability and security issues, so leaders need to weigh the advantages against the drawbacks.
‘Smart contract’ defined
A smart contract is a self-executing program based on if-then logic. For example, vending machines are a ubiquitous presence in everyday life. It’s also a simple model of a smart contract: If someone inserts $2 and then presses B4, then the machine dispenses the package of cookies held in the B4 slot. In other words, if the vending machine receives the required item of value, it performs the requested action.
Smart contracts can run on various architectures, such as distributed ledger technology and blockchain. In the latter case, the program is stored on a blockchain and executes when specific conditions trigger the next action. For example, a service could trigger a payment or service delivery. Smart contracts are one of the most popular blockchain use cases, and for many, the term smart contract connotes smart contracts on the blockchain.
A smart contract on a blockchain is useful to automate workflows, moving on to the next step as needed. In the blockchain-based smart contract, an input to the oracle triggers the action. The oracle connects the blockchain to real-world events. It allows inputs and outputs from the real world to execute smart contracts.
There are several types of oracles. For example, scanners and sensors function as hardware oracles. An RFID sensor on a food shipment sends data to a smart contract that then releases payment to the supplier. For another example, an oracle in an IoT device can capture a wide range of useful data that an artificial intelligence system manages. The AI system then uses the data to activate smart contract processes automatically.
Smart contracts on blockchains don’t require private keys, typically necessary for enterprise blockchain security. Instead, the code powering smart contracts controls the private keys, which means anonymous users could audit the data. But there are possibilities for decentralizing smart contracts further to accept a private key.
Here are some real-world examples of smart contracts and the drawbacks of using smart contracts in an enterprise blockchain project.
1. Improve a digital advertising campaign
Smart contracts can potentially help advertisers and publishers build strong relationships. A smart contract can include conditions that a publisher achieves predetermined targets. When an oracle confirms that the publishers have done what they were supposed to, the smart contract triggers a payment to them. For example, a clause could stipulate that a social media account with many followers must promote a discount code. After 100 legitimate purchases using the code, the owner of that social media account receives payment. In addition, smart contracts could eliminate problems, preventing deceptive tactics like pixel stuffing or publishers from overstating the impressions received with a particular ad.
2. Build the best customer experience
Smart contracts can cultivate a stronger B2C relationship in real time. 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. It could boost customer expectations by supporting runners who enjoy listening to music and tracking their fitness.
3. Fill the void in entertainment consumption
Blockchain could improve how consumers interact with their preferred entertainment choices. For example, nonfungible tokens, commonly known as NFTs, authenticate digital asset ownership. A smart contract can streamline the buying, selling and trading of NFTs. Furthermore, there is interest in using smart contracts to pay independent creators such as authors, musicians and filmmakers. This automation removes the need for intermediaries to process royalty payments.
4. Eliminate the go-between in financial transactions
Blockchain technology has brought attention to decentralized finance. It is most associated with peer-to-peer (P2P) cryptocurrency transactions like bitcoin and ethereum. Digital currency using a smart contract could reduce the time and cost of settling these transactions. In addition, smart contracts show promise in automating manual banking processes traditionally performed by a financial institution, such as evaluating loan eligibility, processing claims and implementing regulatory compliance.
5. Enhance the healthcare communication pipeline
Clear communication is critical for both insurers and patients. Storing a patient’s chart on the blockchain could potentially cut down on paperwork processing, improve regulatory compliance and supply straightforward information sharing between providers. For instance, a patient requires a specific medical procedure. A prior authorization request triggers a smart contract by digitally reviewing insurance coverage and releasing payment to the overseeing facility.
6. Maximize productivity for human resources
There is an opportunity to automate an HR manager’s workflow using distributed ledger technology. For example, an HR employee must confirm employment history and perform reference checks. A smart contract could ease onboarding new employees by simplifying these verification tasks. In addition, blockchain could automate responsibilities such as enforcing employee contract terms and penalties and paycheck processing.
7. Boost security for identity and access management
IT leaders must protect users’ digital identities on their systems. Paperwork done to process identity requests manually is not timely enough in a digitally dependent world. Persistent threats like data breaches show the need for alternative options. Authenticating a user via a smart contract could augment or replace conventional identity management procedures.
8. Elevate relationships in the insurance industry
Insurers and policyholders engage in countless multifaceted interactions. Some existing roadblocks to a strong insurer and policyholder relationship include the complex verbiage of insurers’ policies and fraudulent claim submissions by policyholders. The use of smart contracts could improve efficiency around sending claims, a policyholder switching insurance companies or cooperation between insurance companies. Also, insurers could detect malicious actions early through the smart contract code.
9. Optimize supply chain management
Certain areas of supply chain management may particularly benefit from enterprise blockchain. Smart contracts could increase the traceability of products and materials. For example, certain blockchain software could track an item’s origins as it moves between international supply chains, calculating tariffs immediately. But some organizations are exploring smart contracts on blockchain too. In those cases, blockchain has the potential to improve efficiency and minimize errors.
10. Efficient distribution of utilities
The opportunity to use blockchain technology in the energy industry is growing. For example, it could automate electricity delivery from an energy company to a consumer. Executing smart contracts could streamline energy trading by connecting smaller energy producers. A smart contract could also certify renewable energy sources. Blockchain’s ability to process and record transactions permanently make implementation promising.
8 drawbacks of smart contracts
As with any change to how an organization processes transactional exchanges, there are concerns about integrating smart contracts on blockchain into an enterprise ecosystem.
One of the benefits of smart contracts is that it inherits blockchain’s strengths, like immutability. However, it also takes on blockchain’s challenges, such as security and privacy. IT leaders should understand the risk of implementing enterprise blockchain technology because of these disadvantages. These unpredictable risks should affect whether a blockchain project investment is feasible.
1. Compliance
There are minimal government and international regulations for smart contracts and the underlying blockchain technology. However, more companies are adopting blockchain projects, which means more scrutiny. Creating corporate compliance policies may help mitigate losses due to significant threats. These risks include blockchain network attacks, cryptojacking and human incompetence.
2. Data integrity
Automating data processing via smart contracts could benefit a company dependent on multiple transactions. However, there is the issue of faulty data input. A bad actor, a poorly trained user or a user simply missing 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, bad actors 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 a smart contract application is immune. An unsecured, poorly coded smart contract could expose an enterprise blockchain project to threats.
4. Scalability
It’s challenging for public blockchain technology to scale well. The blockchain must be able to sustain many transactions simultaneously. This maintenance causes an increased workload between nodes, requiring computing power, electricity and bandwidth consumption. Sharding and applying proof-of-stake algorithms show promise to mitigate this drawback.
5. Security
The blockchain technology behind smart contracts improves as more companies add them to their ecosystems. However, security risks exist if the smart contract on blockchain is poorly coded or inadequately maintained. But the essential step of establishing a governance model could help an organization stay ahead of these challenges.
6. Standards
An enterprise blockchain’s advantage over a public blockchain is that approved users interact with the data within a private, controlled ecosystem. Those approved users may come from outside companies whose data collection and processing standards may not translate well in a B2B relationship. A well-coded smart contract may eliminate these data disparities to ensure smooth transactions while strengthening business communications.
7. Sustainability
The public blockchain has a massive carbon footprint. There are discussions on decreasing its environmental impact, and technology leaders concerned with sustainability should be aware of these options. An enterprise blockchain tends to use less computational resources than a public blockchain, and careful maintenance can help the project remain that way.
8. Talent
The nature of a shared ledger means multiple parties require access to the data, potentially opening up an organization to bad actors and external vulnerabilities. Depending on the permission levels of the blockchain storing the smart contract, a business should be vigilant about managing threats. Investing in a blockchain developer or development team would help an organization avoid potential issues. In-house developers should conduct audits to minimize threats, use trusted third parties to perform penetration tests and evaluate security.
Guilliean Pacheco is an associate site editor covering CIO strategy, digital transformation and sustainability. Before joining TechTarget, she was a freelance writer and copy editor.