Smart Contracts

Why Machine Builders (OEM’s) Will Love Blockchains and Smart Contracts

Thursday, May 24, 2018

All too often, supply chains are hampered by paper-based systems.  Within these systems, forms have to pass through numerous channels for approval which increases risk. Recently, companies have begun to look at smart contracts, a blockchain-based solution that eradicates this inefficient system by providing a secure and accessible digital version to all parties involved.  

Smart contracts automate tasks and payments electronically, this complex methodology simplifies the overall transaction. OEMs are drawn to this because of their inherent nature of optimizing workflows and wanting to simplify their businesses processes.  

Here, we will discuss the applications, benefits, and opportunities surrounding smart contracts.

Smart Contracts: What Are They?

Smart contracts are encoded blocks of transactions that are uploaded on the blockchain, essentially following if-then scenarios. For example, an organization can choose to encode a scenario such as, “if X transaction occurs, then we will do Y.” Using blockchains’ decentralized ledger, smart contracts are agreed upon by both the buyer and the supplier, assisting them in exchanging currency and assets.

Smart contracts are converted to computer code (which programs its terms and conditions, so that they cannot be changed), stored and replicated on the system, and are executed and supervised by the associated blockchain network. Meaning, that each node or person who has been involved in the blockchain now verifies the smart contract.  This verification is the confirmation that the contract being executed is correct, according to the information that node has.  This verification method makes the contract extremely secure because even the smaller unwanted change in the contract will be picked up by one of the nodes confirming the contract.

Another factor which is important to the conversation is Ethereum. This is a type of blockchain methodology that can work in conjunction with smart contracts; it’s in the same league as the Bitcoin methodology.  Like Bitcoin, Ethereum is a cryptocurrency and can be bought and sold, and all confirmations for transactions are handled over the blockchain. These contracts differ from traditional contracts in the way that they not only define the rules and penalties around an agreement but automatically enforce them.

The Benefits

Smart Contracts have quite a variety of implicit and explicit benefits. Primarily, the feature of ledger feedback allows regulators to see the market’s activity (such as transferring money or receiving product) while maintaining the privacy of each party involved.

Smart Contracts also eliminate the need for middleman services. Traditionally, you’d go to a lawyer or notary, pay, and then wait to receive a document. With smart contracts, the simplified process can be likened to a vending machine; you can get the document by simply dropping a cryptocurrency token into the ledger. Of course, we may still need lawyers in certain instances, given that the contracts can be changed in real time with the consent of both parties.

Another excellent feature to utilize is contract leakage. It can be used to find the amount of purchases made without considering existing contracts. With contract leakage, one can also determine whether this amount has increased or decreased over time, as well as which purchasers, suppliers, supplying plants, product categories, or items are responsible for the leakage. The system is also available to help determine the percentage of your purchase spending that has a contract leakage in a particular time frame.

The Smart Contract Lifecycle

As already mentioned, smart contracts follow simple logic: “If X occurs, then do Y.” Organizations can code a transaction such as: “If the item’s price hits X, then sell the item.” The transactions initiate a chain reaction that takes the information (from X to Y) and performs the next action.

A supplier could issue a smart contract on a blockchain platform that specifies the product definition, quantity, price, availability date, and shipping and payment terms. A manufacturer could automatically search the blockchain for smart contracts that meet its requirements, verify the reputation of the seller for quality and timeliness based on the network of data, and then complete the transaction. Without the need for a manually-generated purchase order, the supplier could then seamlessly locate and execute a smart contract with a carrier for delivery.

What Happens Next?

Each signaled “step” marks a small transaction that otherwise would have been a full traditional contract to buy, sell, invoice, or receive goods. Each individual transaction occurs without the lawyer having to draft a time consuming contract. Thus, entities can effectively perform transactions in real time without wasting time and resources on extra cycles or reviews.

Smart contracts also hold implicit potential for pushing contemporary boundaries. Since they are logic-based, is it possible to push the limits of coding to be more sophisticated? What if we took the leap to make the transactions more like “If they offer price X, then we will offer price Y”?

A lot comes with blockchains and smart contracts, and we aren’t done yet. Make sure you read our second article that expands upon this topic and see how Steamchain can help you navigate these new concepts and processes in order to enhance your business.

Do you have a question? Contact us now!

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