CAN SMART CONTRACTS BECOME THE TOOL TO SECURE COMMERCIAL PAYMENTS?

When promoting my web based contracting platform (www.ant-program.com) I always receive two questions from potential users: “how can I be sure my client will pay” and “how can I be sure that the goods will timely arrive and at the agreed quality level”.

Of course, answers stay in the set of well known tools already available in the “analogic” world: client / supplier selection, credit insurance, pre-payment, third party quality inspection, product certification,… IT technologies are heavily supporting dbases alignment, quicker info circulation, and so on so forth.

However, it seems disruptive innovation is just round the corner and it is now the time to closely monitor such development setting the foundation of a potential new business paradigm.

Not being a “millennial” I find huge difficulties in deepening very technical stuff of this innovative stream, however, I find exciting getting a close look on which applications might become possible in near future; and many questions are, then, arising on this opportunity.

Intention of this brief note, is to promote an open, wide, discussion among everyone involved into the topic, with the purpose to clarify what it could be doable and at which conditions to answer the above mentioned questions. This want to be the way for open contribution to disruptive innovation

 

 

The Magic Words: Blockchain (and Ethereum) – Smart Contract – Crypto-Currency

 

  • Blockchain (and Ethereum)

Some experts affirm Blockchain is the biggest IT innovation since Internet: is it reasonable judgment or just fashion?

In very simple terms, a Blockchain is a “register”, a database spread in “blocks” and distributed among huge numbers of personal computers globally; it is used to securely and safely register values and value transfers without intervention of a “Central Authority”.

The most relevant development of the Blockchain technology is called “Ethereum” as a programming language that makes applications running on Blockchain.

So, while a Blockchain is a distributed register, Ethereum is a distributed program that, also, improves usage of distributed computers network. One of the most relevant application based on “Ethereum” technology is the “Smart Contract”

 

  • Smart Contract

Smart Contract is a program based on the Ethereum technology; it is applicable for any payment/value exchange.

A Smart Contract checks negotiated T&Cs as accomplished then the payment/value will be executed/exchanged in full or partial autorun.

 

  • Crypto-Currency

More and more frequently, terms like “Bitcoin” or “”Ether” or “Litecoin” or others are under the spot mainly due to the boost their value gained as investment assets over the last months.

In reality, such “Crypto-currencies” are needed to register and exchange values and somebody is already expecting these will supersede traditional money (and, subsequently, most part of the global financial institutions).

 

Can Smart Contracts become the tool to secure commercial payments?

So, back to the beginning, can we imagine commercial contracts to be economically executed via Smart Contracts? Which are the main issues to be fixed? Which are the main conditions to be acomplished?

Let’s list down top questions against which answers could come from contribution of everyone interested in sharing own opinions (and leaving apart all pure technical issues for the time being).

  • Whatever the technology, is a Smart Contract the safest tool?

Presently, I’d say “Yes”; that is because once the T&Cs are fully accepted and translated into the smart contract program, it automatically runs with no possibilities to stop against agreement.

Moreover, the program is divided in blocks and shared among a huge number of computers making any fraud tentative almost impossible (or extremely costly)

But, what is built by mankind can be, sooner or later, destroyed: it’s just a matter of time.

  • Does the absence of a Central Authority make any influence?

I think so, at least for one main reasons: trust. In fact, people will put trust on systems only gradually for a matter of conservationism that always hit pure innovation adoption. On top, there won’t be any ways to solve litigation thru Courts unless Smart Contracts will be recognized as binding contracts (which is not yet the case)

On the “pros” side, this absence reduces red tapes, unwanted costs related to bureaucracy

  • Are Crypto-currencies needed?

So far, yes they are: crypto-currency is the way the value can be transferred from seller to buyer. In practice, Company “A” exchanges money (e.g. USD) into crypto-money (e.g. Bitcoin), then pays goods to Company “B that cash in Bitcoins to be converted into USD again; this seems to be the state of art flow.

And this flow opens to further question:

  • Should a Company freeze money in a Crypto-wallet?

In order to make smart contract execution possible, I imagine there should be a provision of crypto-money available at the time of payment; this process might induce financial issues on cash flow due to potential higher level of cash immobilization for longer time

  • How to deal with huge crypto-currency volatility?

We’re learning that ex-rate of crypto vs. std currencies is on the roller coaster and huge variations happens in seconds, not even minutes. Ex-rate risk has to be avoided as much as possible when running commercial business

  • Is the process fast enough?

Apparently systems don’t presently seem fast. Users should rely on a very safe and very fast process, at least safer and faster than current “analogic” processes; speed is also another way to mitigate the risk related to ex-rate volatility. But number of transactions is increasing at faster pace thatn computing power so process is slowing down…

  • Is the process cheap enough?

Transaction cost on users is booming! Blockchain management requires time, power (in terms of both calculation power and electricity) and money to compensate “Miners” representing the network of computers devoted to run the system.

Presently, the time to execute a single “block” process requires minutes and, at increasing number of processes required every second the variable that governs the queue is the cost/execution. Presently, this cost is getting unaffordable for small value transactions (some tens USD value)

  • How does the Politic react?

All this wide topic is presently out of control of Political bodies globally and it is meant to stay out.

In other words, it represents a huge punch to Central Authorities and, more specifically, to the Financial bodies (primarily banks). Can it last long? Well, maybe yes, maybe no. What we can observe now is that some Countries are actively trying to ban usage of crypto-currency pretending to slow down such progression. Let’s see what will be next.

 

In conclusion, I understand the Blockchain as a very innovative technology of which nobody knows yet what is real potential, for which purposes it would work best, which consequences it would bring in our lives, which interests will be jeopardized.

Waiting aside for the answers is an option

Alternatively, we can imagine some application in our “real life” trying to address development to become a real game changer: up to us to provide own little contribution.

Author Gaetano Piermarocchi

More posts by Gaetano Piermarocchi

Join the discussion One Comment

Leave a Reply