Smart contract: Is it a gimmick or a future business trend?

With the development of technologies based on blockchains and distributed ledger systems, a decentralized smart contract has emerged. Smart contracts are decentralized, auto-executable programs that will profoundly impact the future of B2B and B2C. Smart contracts have very bright application scenarios especially in consumer protection and international trade. Oscar Borgogno from Tilburg University conducted a detailed analysis of the above trends and wrote a report entitled "The pursuit of usefulness: on the value of smart contracts for consumers and merchants", Institute of Financial Technology, Renmin University of China (WeChat ID) :ruc_fintech) Edited the core content of this report.

preface

With the rapid development of the financial technology industry, the way of trading is changing rapidly, and the limitations of traditional contracts are beginning to be gradually exposed. With the advent of blockchain-related technologies, a smart contract based on distributed ledgers began to emerge. Some people think that smart contracts can greatly promote the evolution of business models, while some scholars believe that smart contracts are still in their infancy, and its technology is very incomplete, so there is a great risk. This article will discuss the positive and negative impact of smart contracts on businesses and consumers, as well as the future direction of smart contracts.  

What is a smart contract?

 

The term smart contract is accompanied by a lot of misunderstandings. The smart contract is essentially a program: when an event is triggered, the corresponding transaction is executed. In fact, mobile payment is now a simplified version of the smart contract, such as a person online shopping, after his / her purchase, the payment APP will automatically deduct the payment. If the merchant does not execute the transaction within the specified time, the payment will be refunded. This series of actions does not require the intervention of the court, lawyers and other third method agencies to implement. As can be seen from the above examples, smart contracts do not rely on blockchains, but with the rapid development of decentralized related technologies in recent years, smart contracts and distributed ledgers have become increasingly inseparable. The distributed ledger system has the following four characteristics: one is pre-verification, the second is joint management, the third is encryption, and the fourth is decentralization. The combination of smart contracts and distributed ledgers with the above four characteristics makes smart contracts have two new advantages: first, contracts can be exposed to the public or under the supervision of a specific group of people, and second, smart contracts are not executed. Relying on third-party legal agencies. Of course, although the smart contract is reached by both parties, it does not mean that the smart contract will be completely removed from the regulatory requirements set by the government. According to the above, the smart contract is defined in this article as a software running on a distributed ledger system that automatically executes transactions between two or more parties when the conditions specified in the contract are met.

The main advantages and disadvantages of smart contracts

The biggest advantage of a smart contract is that it can be automated without human intervention, resulting in a significant reduction in the cost and risk of the transaction. After the large-scale popularization of smart contracts, the cost of transactions can be considered to be infinitely close to zero, and due to the characteristics of automatic execution, the degree of trust between the two parties will be significantly improved. Furthermore, future transactions may not even require the support of third-party law firms such as lawyers and courts, and both parties to the transaction can avoid cumbersome civil litigation processes when one party defaults. All in all, the characteristics of smart contracts that cannot be changed, executed on time, and automatically settled provide a reliable guarantee for promoting the relationship between the two parties. At the same time, some people think that the effectiveness of smart contracts is over-exaggerated. Some scholars believe that the auto-execution and immutable traits of smart contracts are incompatible with contract-based business models, because both parties often make certain amendments to the contract based on their own financial situation, and smart contracts are immutable. In addition, commercial contracts sometimes confuse the terms so that the parties can flexibly execute the contract in some cases. However, the fuzzy logic cannot be abstracted into computer code. This is the biggest flaw of smart contracts. Simply put, the trading behavior between people is very complex and variable, so it is difficult to completely abstract into an automated program.

Therefore, the potential of a smart contract can only be fully motivated when the following two conditions are met. The first condition is that the logic of the contract for the transaction is not complicated and can be compiled into computer code very accurately. The second condition is that the parties or parties to the transaction agree not to modify the terms of the contract in the future. Next, this article will be more promising applications for smart contracts in the B2C, B2B field.

Corresponding to the impact of consumers and businesses

Before discussing the application prospects of smart contracts in B2C and B2B, we first need to discuss the impact of smart contracts on the B-side (enterprise) and C-side (consumer). Some scholars and industry research believe that smart contracts have a negative impact on the maintenance of consumer rights, because they believe that consumers are in a weak position throughout the entire process, and companies may use the characteristics of smart contract auto-execution to enforce some unfair treaties. , thereby damaging the legitimate rights and interests of consumers. However, the automation execution itself is not good or bad for consumers, the key lies in the content of smart contracts. If the contract content is fair, smart contract technology can greatly reduce the cost of protecting consumers' rights . Traditionally, consumer rights protection is a very time-consuming and laborious task. Many consumers give up their rights because of the high cost of rights protection. However, smart contracts have the characteristics of automatic enforcement, which means that once a company infringes on the rights of consumers, regardless of the value of the contract, consumers can be compensated at almost zero cost. Smart contracts can also bring certain benefits to the enterprise. Especially in the B2B mode, the automatic execution of smart contracts can effectively enhance the trust between enterprises and enterprises, increase the liquidity of corporate funds, and reduce the credit risks and counterparty risks faced by enterprises.

Possible future application scenarios

Regardless of the consumer or the enterprise, as mentioned above, the smart contract must meet the two conditions mentioned above in order to take advantage. For example, the EU's regulations on passenger protection measures are very clear and easy to translate into codes, so smart contracts have a very bright application in the protection of passenger rights in the EU. The EU stipulates that passengers who take a waterway or sea route within the EU may experience a delay of more than 25% of the fare. This kind of stipulation logic is very clear, so it is very conducive to the conversion into a smart contract. After the conversion, the passengers will be compensated immediately without having to go through the telephone complaints, and the cumbersome process of filing the complaints, so that the smart contract can be seen at the C end, especially It has a very broad application space for consumer protection. The most promising application scenario for smart contracts on the B side is international trade. According to WTO estimates, the total value of exports of goods worldwide has exceeded $11 trillion in 2017, but international trade still relies on paper contracts and the entire trade process is extremely cumbersome. Although the process is cumbersome, the international trade contract is highly standardized and the entire transaction process and settlement process are highly unified, so it is very conducive to the establishment of smart contracts. Smart contracts have two major benefits for international trade: the first is to reduce settlement time, and the second is to reduce legal risks. Because of the difference in the legal system of the country and the country, once one party defaults, the other party's rights to defend rights are extremely large, and smart contracts can solve this problem.

Challenges and opportunities

The development direction of smart contracts is determined by two factors: one is the degree of decentralization of the distributed ledger system, and the other is the regulation of policies. The basis of intelligent contracts is the distributed ledger system, so the degree of decentralization of distributed ledgers determines the rigor, credibility and stability of smart contracts. Although smart contracts, blockchains, and distributed ledgers have been widely discussed in recent years, in fact smart contract technology is actually in its infancy. But one thing is certain: if a smart contract is to develop well, it must balance the degree of decentralization with the degree of supervision. Regulators also face many thorny issues, such as whether to consider forcing some terms into smart contracts to protect consumer rights. If so, what terms should be written? How to balance the conflict of interest between enterprises and consumers? How to calculate the tax rate when the smart contract between enterprises and enterprises is implemented? This series of issues requires regulatory considerations. Fortunately, with the development of computers, sandbox isolation testing technology has matured. Regulators can allow some companies to test run in a closed sandbox test environment to explore the best regulation. Ways and levels of intervention. It is finally determined that the regulatory body has established relevant laws and regulations based on the problems exposed in the test.

to sum up

All in all, smart contracts will play an important role in B2B and B2C in the future. Specifically, the client can better protect customer rights and reduce transaction time and cost on the enterprise side. However, smart contracts are not omnipotent, and smart contracts are only Can be used in contracts that are simple in logic and do not need to be changed. In the future, regulators need to work with smart contract developers to explore a suitable degree of decentralization to maximize the benefits of smart contracts.

Transfer from | Institute of Financial Technology, Renmin University of China

Source | "Smart Contracts in Blockchain: The Role of Contract Regulations"

Author | Oscar Borgogno