Blockchain in 2017: The Year of Smart Contracts

If you think about a blockchain as a distributed operating system (OS) for data, then smart contracts are its killer app. At the inaugural Smart Contracts Symposium held at Microsoft’s New York City headquarters, blockchain experts and companies from the burgeoning space gathered to discuss the myriad of ways that smart contracts are poised to disrupt the status quo in 2017 and beyond.

Nick Szabo, a computer scientist, legal scholar, and cryptography expert, wants you to think about smart contracts as almost like a blockchain-based vending machine. One side chooses to perform an action (puts in coins) and the machine verifies that performance and responds (dispenses item and change).

“You could think of a vending machine as a kind of contract: put in dimes, nickels, or quarters, and you get a soda back plus change,” explained Szabo. “That’s tedious to design a contract for, so we built a machine instead. Blockchains are the most secure environment to run smart contracts. Think of a blockchain like an army of robots checking up on each others’ work. Where traditionally you have accountants and lawyers, there are now a wide variety of things we can do with this vending machine-like mechanism to replace the job of traditional contracts plus added cryptographic mechanisms for integrity.”

Szabo, the symposium’s keynote speaker, has periodically been rumored as Bitcoin creator Satoshi Nakamoto himself. Szabo coined the concept of a smart contract as “a computerized transaction protocol that executes the terms of a contract” back in the mid-1990s, long before blockchain was ever invented. Szabo said public blockchains such as Bitcoin and Ethereum are the ideal secure, reliable infrastructure on which to deploy and execute smart contracts to completely redefine what contract management looks like.

Click to view full infographic. Image credit: Blockgeeks

What Makes Smart Contracts “Smart”?

Blockchain is an intricate concept that often gets bogged down in technological complexity. During the main “Platforms, Applications and Innovation” panel of the symposium, moderator Eric Piscini, Global FSI Blockchain Leader at Deloitte, asked the panelists to describe smart contracts as if they were explaining them to a teenager.

“Think about getting carded at a bar,” said Jerry Cuomo, Vice President of Blockchain Technologies at IBM. “From an identity perspective, I can imagine a blockchain managing verification of a citizen’s identity. A smart contract could ensure something like my daughter going out for her 21^st birthday and the bouncer only being able to see her age, not her address. Blockchain could set up a centralized identity verification system that could make the world safer for dads like myself.”

Cuomo said there’s an opportunity for smart contracts to really re-imagine business processes. IBM and Microsoft are two of the major tech players in the so-called Blockchain-as-a-Service (BaaS) space, using their public cloud platforms and developer tools to help enterprise organizations build out blockchain infrastructure. Marley Gray, Director of Business Development, Blockchain at Microsoft, described smart contracts as a mechanism for creating a more collaborative economy. Smart contracts can execute complicated multi-party agreements beyond the capability of any singular organization.

“Take it back to basics,” said Gray. “What does exchanging value mean? Go back to simple bartering: I’ll give you that chicken for this piece of wood. Blockchain and smart contracts can facilitate that exchange of value across organizational boundaries with a lot of moving parts. You have to rethink your individual business-to-business [B2B] relationships, business-to-customer [B2C]—fundamentals way above the technology of how we interact on a day-to-day basis.”

Click to view full infographic. Image credit: Capgemini ConsultingJeff Garzik, co-founder and CEO of enterprise blockchain startup Bloq, broke down smart contracts in one tweet-sized explanation: a set of rules evaluated by an automated system where all parties agree to a common rule set.

Garzik was recently elected to the Linux Foundation Board of Directors as the first member with a blockchain background. Garzik is also a past Bitcoin core developer who spent a decade working on Linux for Red Hat. He added that smart contracts are a computerized version of an English language paper contract, with a level of automation that essentially provides “adjudication-as-a-service.”

“Smart contracts validate rules common to the entire blockchain, which gives you this neutral, level playing field for everyone connecting to that network,” explained Garzik. “Blockchain gives you a validation step that actors have performed according to smart contract rules. The adjudication is a hyper real-time version of the court system. Did this actor perform? Okay, the blockchain verifies the execution of performance related to the laws in the contract and then the blockchain automates that.”

As for where we’ll see smart contracts emerging in 2017, many panelists pointed to identity management. We’re all going to have digital identities, be it on our smartphones or in everyday relationships with businesses, institutions, and individuals, explained Microsoft’s Gray. It’s something the IT industry needs to solve and blockchain may be the answer.

“For the first time in history, we have the right context for global identity,” said Joseph Lubin, founder of blockchain company ConsenSys. “Nobody’s going to ‘adopt’ blockchain. The Web 3.0 will just be the web. People are going to like and start using new applications and those applications will be built on a back end of these decentralizing technologies. This will just be a new way of interacting with each other.”

Why D.C. Is Keeping an Eye On Blockchain

Blockchain and smart contracts are already on the US government and regulatory’s radar. The symposium’s closing session entitled “Code is Law?” put lawyers onstage along with representatives from the Financial Industry Regulatory Authority (FINRA) and the US Commodities Futures Trading Commission (CFTC) to talk through the legislative and regulatory hurdles.

“In two years we’ve gone from Bitcoin to distributed ledgers to distributed infrastructure and now to smart contracts, and it will continue to evolve,” said Kavita Jain, Director of Emerging Regulatory Issues at FINRA. “I don’t get picky about terminology. Smart contracts are a digital code representation of a contract and they go across a wide spectrum of use cases.”

Jain said D.C. regulators have been actively engaging with the blockchain industry for the past two years to learn what’s happening in the space. Sayee Srinivasan, Chief Economist at the CFTC, added that he recently attended a meeting with the Board of Governors of the Federal Reserve to discuss information sharing among financial regulatory associations regarding blockchain.

Regulation will always be playing catch-up with technology. Srinvasan called it an “imperfect evolutionary process” but said Washington is doing its best to keep the regulations and legal frameworks lined up with the pace of blockchain adoption.

“The moment the conversation shifted from cryptocurrency to distributed ledgers, we all woke up,” said Srinvasan.

Smart Contracts: 12 Game-Changing Uses

The Chamber of Digital Commerce, the leading trade association that represents the blockchain industry, organized the symposium and also runs the Smart Contracts Alliance. The Chamber and Alliance (in collaboration with Deloitte) released a new white paper timed with the symposium entitled “Smart Contracts: 12 Uses Cases for Business & Beyond.” The white paper runs through a dozen different broad areas in which smart contracts can automate and redefine how we work.

Below we’ve summarized the 12 key insights from the report, including current benefits and challenges to execution. As we begin to see blockchain-based smart contracts proliferate in 2017, look for first-mover businesses and researchers on these 12 frontiers.

1. Digital Identity
On an individual level, smart contracts can let users own and control their own digital identity across factors such as reputation, data, and the digital assets associated with them. Smart contracts can also play a role in designating what personal data is and isn’t shared with businesses. It’s what the report calls a “user-centered internet for individuals.”

Benefits: Personal data control; companies don’t need to hold data.
Challenges: Single point-of-failure is a hacking target; third parties could be a source of data leakage.

2. Records
Automating compliance around rules such as “required destruction of records by a certain date” is a no-brainer use case for smart contracts. According to the white paper, smart contracts can digitize Uniform Commercial Code (UCC) filing and automate record renewal and release, while “atomically perfecting a lender’s security interest at the moment of a loan creation” for factors such as collateral. The smart contract needs to be capable of storing data on a distributed ledger without slowing performance or compromising data privacy.

Benefits: Reduced legal bills; automated loan tracking; automatic record disposal.
Challenges: Moving away from paper-based filing; UCC and government filing/archiving is manual, error-prone.

3. Securities
Getting deeper into fintech, smart contracts for capitalization “cap table” management can simplify things such as automatic dividend payments, stock splits, and liability management for private companies. The white paper projects we’ll see this in private securities markets faster than in public ones. Though in the state of Delaware, smart securities company Symbiont is already facilitating a shift to cryptographic blockchain signatures on stock certificates as part of the Delaware Blockchain Initiative.

Benefits: Digitized end-to-end securities workflows; automatic dividend payment; stock splitting.
Challenges: Manual, paper-based process to replace; intermediaries increase cost and risk.

4. Trade Finance
On a global scale, the white paper states that smart contracts can facilitate streamlined international goods transfers with higher asset liquidity. Automation around Letter of Credit and trade payment initiation can create a more efficient, less risky process between buyers, suppliers, and financial institutions.

Benefits: Faster payment approval; more efficient trade, transport, and contract agreements.
Challenges: Physical document management; document fraud; duplicate financing.

5. Derivatives
There’s a reason the fintech industry is arguably the biggest driver of blockchain innovation. Smart contracts can enforce a standard transactional rule set for derivatives (a security with an asset-dependent price) to streamline Over-The-Counter (OTC) financial agreements. Symbiont CEO and Smart Contracts Alliance co-chair Mark Smith called OTC financial agreements out as one of the most immediate smart contract use cases.

Benefits: Automated settlement and external trade event processing; real-time position valuation.
Challenges: Redundant OTC asset-servicing process; paper-based transaction agreeements.

6. Financial Data Recording
Smart contracts can serve as an enterprise-grade accounting ledger to accurately and transparently record financial data. Once blockchain-based standards, interoperability with legacy systems, and a streamlined transaction portal and marketplace develop, the use case could improve everything from financial reporting to auditing.

Benefits: Transactional data integrity and transparency; reduces accounting data management costs.
Challenges: Accounting system errors and fraud; capital-intensive process.

7. Mortgages
Getting a mortgage is often a manual and confusing process. Smart contracts can automate every aspect of the transaction, including payment processing and property liens to make closing on a property and signing a mortgage agreement a faster and more efficient process. It doesn’t work without blockchain-based digital identity, though.

Benefits: Automated lien release; reduced errors and cost; increased property data visibility; verification.
Challenges: Friction between various parties (contract, borrower, real estate title record); data privacy.

8. Land Title Recording
Property transfers and land title ownership can be rife with fraud and disputes. Smart contracts can facilitate property transfers to improve transaction integrity, efficiency, and transparency. Countries around the world, including Georgia, Ghana, and Honduras, are already implementing blockchain for land title recording.

Benefits: Eliminates shotgun mortgage fraud.
Challenges: Multiple parties viewing same property; manual delays; identity verification.

9. Supply Chain
Smart contracts can provide greater visibility at every step of a supply chain, coordinated with Internet of Things (IoT) devices tracking managed assets and products from factories to the point-of-sale (POS). Companies such as Everledger and IBM are already using the blockchain for supply chain visibility to track everything from diamonds to Chinese pork.

Benefits: Simplifies complex multi-party systems; granular inventory tracking; reduced risk of fraud and theft.
Challenges: Data incompatibility and supply chain blind spots.

10. Auto Insurance
In the auto industry, smart contracts can automate insurance claims to provide near-instantaneous processing, verification, and payment. In a nutshell: if two parties get into an accident, then they can resolve the claim through insurance in hours or days rather than in weeks or months. The car insurance claim process is frustratingly disjointed and smart contracts can clean it up.

Benefits: Vehicle “self-awareness” and damage assessment using sensors; policyholder data repositories.
Challenges: Subjective damage diagnostics; duplicate forms and insurance provider verifications.

11. Clinical Trials
Clinical trials, or medical research studies involving people, are always sensitive agreements when it comes to participants’ data privacy and monitoring the experiments involved. Smart contracts can be a mechanism for cross-institutional visibility and build in privacy-focused rules that improve data sharing between institutions, while automating and tracking patient consent. The white paper calls it a potential force for “positive disruption” in the clinical trials community.

Benefits: Increased trial visibility; data sharing; automated patient consent; patient privacy.
Challenges: Under reporting; inconsistent consent management; institutional delay.

12. Cancer Research
Finally, the white paper states that smart contracts can “unleash the power of data” to facilitate the sharing of cancer research. Similar to clinical trials, smart contracts can automate patient data consent management and incentivize data sharing while maintaining patient privacy.

Benefits: Data sharing; patient privacy.
Challenges: Cumbersome, cross-institutional research sharing.

Download the Chamber of Digital Commerce’s full white paper for more information.