Smart contracts can redefine business — But this doesn’t imply wide openness

Published at: Jan. 19, 2022

In his monthly crypto tech column, Israeli serial entrepreneur Ariel Shapira covers emerging technologies within the crypto, decentralized finance and blockchain space, as well as their roles in shaping the economy of the 21st century.

The contract, an obligation that party A will do something party B desires at a price both agreed to be fair, is in many ways foundational for a functioning human society. As a testament to that, even King Hammurabi, credited as the author of one of the oldest legal codes in the world, saw it fit to codify regulations on the ties and contractual obligations between merchants and their agents.

While in the great ruler’s time, merchants trusted their agreements to clay tablets, today’s counterparts are increasingly trusting their contracts on the blockchain. They look to tap smart contracts, decentralized applications (DApps) stored on-chain as executable code, that can be set off by any network user. Once an innovation brought along by Ethereum, smart contracts now find themselves powering hundreds of decentralized finance (DeFi) services where users trust the code instead of a centralized entity. While centralized entities can perform many of the same functions, DeFi is built around the idea that centralization fosters censorship and inefficiency while decentralized services are more open, transparent and secure.

All of this translates quite nicely into the corporate world. Any business operation often incorporates a specific sequence of actions that the company loops through again and again. Sounds a bit like a computer algorithm, doesn’t it? The same goes for a contract, especially with its terms and conditions easy to imagine as a set of constants with if-else terms and conditions. An automated and self-enforcing contract greatly reduces operational uncertainty. By making it decentralized, companies keep the balance of power intact, avoiding the need to trust a centralized middleman. It is perhaps blockchain’s most important gift to the business community.

It is, thus, no surprise that more and more companies are bringing smart contracts to the business world. Watr Foundation, an institutional blockchain project, is moving commodities trading on-chain, with smart contracts managing the bulk of the associated processes. ClearX taps smart contracts to help companies settle complex agreements such as roaming disputes between telecom providers. SEIF applies a similar logic to legaltech, providing clients with a plethora of templates to use. The momentum is there and further down the line, we will likely see more major companies embracing smart contracts.

Crypto enthusiasts might see this as a promising trend at first glance. More companies using blockchain means more cash and liquidity for the cryptocurrency ecosystem, and that means more fuel for the Moon voyage, right? Not necessarily.

Building walls, not bridges

Let’s imagine a future where enterprises have marched on-chain and entire ensembles of smart contracts now manage their day-to-day interactions. This gargantuan digital infrastructure relies on millions of data streams from sensor-ridden automated production lines to smart shipments beaming out updates on their location and status, and with everything validated, authenticated and paid for with little to no human input. The payments are in tokens, of course, and “blockchain” is written all over the picture.

But, here is the first catch: Nobody said any of the blockchains powering this have to be public. If anything, it only makes sense for enterprises to opt for private and permissioned blockchains, which would be closed for everyday investors and traders. This sort of crowd would only ruin the party by bringing a speculative element into a system where all major actors are actually interested in having a stable unit of value. Otherwise, transacting within this ecosystem gets much harder. A public blockchain does not place the burden of funding and maintaining it on its members, but enterprise-grade companies will hardly find themselves encumbered by that.

Stablecoin issuers should not get too enthusiastic about this picture either. It's true that now they are positioned much better for enabling all things business-to-business since they do offer tentative stability, which is what businesses need. Those of them who manage to get into B2B blockchain projects right now might as well turn in a nice profit. Further down the line, though, they may end up dethroned by central bank digital currencies (CBDCs).

From a business standpoint, a CBDC — a “wrapped” one, perhaps, i.e. brought on-chain like wrapped Bitcoin (wBTC) on the Ethereum network — works nicely for on-chain payments because it takes away a huge assortment of uncertainties associated with crypto. Besides being as stable as fiat can be, it is hardly marred by any sort of regulatory plights and is very much legal tender, as opposed to the native tokens that their private blockchains could use.

Related: Private, public and consortium blockchains: The differences explained

A corporate embrace of the blockchain may make for an interesting — if not epochal — event, but there’s more to it for a technology geek than for a speculative trader. Keeping things public hardly makes that much sense if what you’re after is a stable and smooth-operating system and not a free-for-all race to the Moon.

The other side of the coin

Yes, much of our vision for the future of business is powered by private blockchains, walled-off from the white noise of the larger world. It’s just as easy, however, to envision a more public-facing business-focused ecosystem — but one focused on smaller-size players who stand just as much to gain as giants from this transformation. From trustless operations based on smart contracts to opportunities for fund-raising via token offerings, or even promo events tapping nonfungible tokens (NFTs) for customer loyalty, many options are on the cards.

The difference is small and medium-size companies may prefer to tap public blockchains instead of walling off in their private ones simply because they bring so many resources to the table without placing any extra costs on them. This includes thousands of nodes already in operation, as well as an array of services up and running courtesy of independent dev teams. So, anyone looking to simplify blockchain for small and medium-sized enterprises could be in for a nice niche market.

As innovative as Bitcoin (BTC) was on its own back in the day, the technological evolution it set into motion is moving ahead, slowly but surely. It may be true that you cannot solve any problem by simply putting it on-chain, as some of the most fervent evangelists seem to believe, but it’s just as true that there are spheres and tasks that can benefit from decentralized solutions. Business is one of these spheres, and while its biggest players will likely choose to stick to their own lot, the others will be more open to the public, bringing more opportunities for retail investors as well.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Ariel Shapira is a father, entrepreneur, speaker, cyclist and serves as founder and CEO of Social-Wisdom, a consulting agency working with Israeli startups and helping them to establish connections with international markets.