Smart Contracts: 12 Use Cases for Business & Beyond
A Technology, Legal & Regulatory Introduction — Foreword by Nick Szabo
It is exciting to see my vision for smart contracts, that I conceived over 20 years ago, blossom into so many different and creative directions. Evolution toward smart contracts would be inevitable even if the concept did not exist. Financial companies have, since I first explored these ideas in the 1990s, already implemented what are effectively smart contracts without using that phrase.
As much as smartphones are more functional than traditional phones... can also reduce counterparty risk and expand credit and other contracting opportunities through such trust-shifting technology.
Blockchain technology appears very much to be the jet fuel necessary for smart contracts to become commonplace in business transactions and beyond. It is a delight to be part of a community committed to fostering the tenants of open-source cooperation, privacy and security, education in technology and working for a common social good.
Overview
What Are Smart Contracts?
In 1996, Nick Szabo described a smart contract as "a set of promises, specified in digital form, including protocols within which the parties perform on these promises." While the technology available to support smart contracts has evolved considerably since then, this definition continues to capture the essence of what a smart contract is and does.
Taking each element of Szabo’s definition in turn:
- A smart contract operates electronically
- They may consist of contractual terms and/or rules-based operations designed to carry out business logic
- It consists of lines of code as well as the software that prescribes its conditions and outcomes
- Contractual clauses and/or functional outcomes are embedded as code within software
- A computer protocol in the form of an algorithm constitutes a set of rules for how each party should process data in relation to a smart contract
Smart Contract Models
What are the different models for smart contracts?
| Smart Contracts Lie on a Spectrum | |||
|---|---|---|---|
| Contract entirely in code | Contract in code with separate natural language version | “Split” natural language contract with encoded performance | Natural language contract with encoded payment mechanism |
Other permutations are, of course, possible and are likely to emerge as smart contract applications develop.
Regardless of model the smart contract deployed, they all involve code. Code can contain bugs. Code may not always perform as the parties had intended. Messages transmitted over the internet can be delayed or interrupted, and data can be corrupted in transmission.
Twelve Use Cases for Smart Contracts
Smart Contracts for Digital Identity
Smart contracts can enable individuals to own and control their digital identity containing reputation, data and digital assets. This allows individuals to choose what personal data to disclose to counterparties, giving enterprises the opportunity to seamlessly know their customers.
Current Challenges
- Expensive and time-consuming Know Your Customer (KYC) processes that lack completeness
- Limited control over potential data leakage due to an individual’s reliance on trusted third-parties
Smart Contract Benefits
- Counterparties will not need to hold sensitive data to verify transactions, reducing liability while facilitating frictionless KYC
- Increased compliance, resiliency and interoperability
Smart Contracts for Records
Smart contracts can digitize Uniform Commercial Code (UCC) filing, and automate their renewal and release processes. Additionally, smart contracts can atomically perfect a lender’s security interest at the moment of a loan creation.
Smart Contracts for Securities
Capitalization table management can be simplified, and intermediaries circumvented in the chain of securities custody through the implementation of a smart contract. The smart contract can facilitate the automatic payment of dividends, stock splits and liability management, while reducing counterparty and operational risks.
Smart Contracts for Trade Finance
Smart contracts can facilitate streamlined international transfers of goods through faster Letter of Credit and trade payment initiation, while enabling higher liquidity of financial assets.
Smart Contracts for Derivatives
Post-trade processes can be streamlined through smart contracts, eliminating the duplicative processes performed by each counterparty for recording and verifying trades, and executing applicable trade level and other lifecycle events.
Smart Contracts for Financial Data Recording
Financial organizations can leverage smart contracts for accurate, transparent recording of financial data. Smart contracts enable uniform financial data across organizations, improved financial reporting, and reduced auditing and assurance costs.
Smart Contracts for Mortgages
Smart contracts can automate the otherwise confusing and manual process behind a mortgage contract. A smart contract in this case automatically connects the different parties involved with mortgage transactions, allowing for a frictionless and less error-prone process.
Smart Contracts for Land Title Recording
By facilitating property transfers through smart contracts, fraud propensity can be reduced while increasing confidence in identity. These transactions can occur with increased efficiency, integrity, and transparency, resulting in reduced cost and enhanced liquidity.
Smart Contracts for Supply Chain
Smart contracts can provide visibility at every step of a supply chain. Internet of Things devices can write to a smart contract as a product moves from the factory floor to the store shelves, providing real-time visibility of an enterprise’s entire supply chain.
Smart Contracts for Auto Insurance
Currently, the car insurance claims process is disjointed, but the process can be improved significantly through smart contracts. The smart contract records the policy, driving record, and reports of all drivers, enabling Internet of Things-equipped vehicles to execute initial claims shortly after an accident.
Smart Contracts for Clinical Trials
Clinical trials can benefit from smart contracts through increased cross-institutional visibility. The smart contract includes privacy-preserving computation that improves data sharing between institutions while automating and tracking consent for patient data.
Smart Contracts for Cancer Research
Smart contracts can facilitate the sharing of cancer data throughout a cancer research consortium. The smart contract can facilitate the otherwise cumbersome patient consent management process and incentivize aggregate data contribution and data sharing while maintaining patient privacy.
Legal and Regulatory
As stated in the beginning of this paper, there is a spectrum of possibilities for smart contracts... it is important to provide parties with confidence that code can survive a Statute of Frauds challenge.