The so-called Smart contracts have been around for quite a while with the first global public implementation made available with 2015. This technology is a real breakthrough proved to be very disruptive over several use cases.
By the way do you know what a smart contract is? Well to start with, it is neither smart nor a binding legal contract! It is rather a piece of code running on a which implements agreed business rules between two or multiple parties.
How can this distributed piece of code be useful for a business? One example which has been very popular over the last year is asset tokenization: Initial Coin Offering (ICO) are most often representing a share of newly created start-up. The sudden emergence of the phenomenon has enabled start-ups to get funding directly from investors disrupting the venture capital market. Out of this fast development, have been classified, depending on their use, into three main categories:
· Payment : used as a mean of payment. Crypto currencies like are typical payment .
· Security : that are like traditional securities, ICO have been the first popular example of this kind of .
· Utility : those are meant to be used to buy a service provided by the issuer. This is like selling forward goods or services that are going to be provided in the future.
We’ll concentrate here on utility and their potential deep impact on how corporate systems are designed.
In the first place, one could consider a utility as a simple mean of exchange. The customer buys in advance a service he will later use. Conceptually nothing new there: these mechanisms have been used in structured financing. For example, in large projects like power plans, the banks financing the plans are buying the future power production as part of the structured financing. Same concept with crowdfunding with platforms like Kickstarter where the buyers are paying now for a product or a service they will get (hopefully) some time later. The which has been bought can then be used when the good or the service is made available by the provider.
The breakthrough is not in the concept itself but more in the impact of having these in a digitalised form: those forward agreements are not any more sitting on piece of paper but on a public platform like , stored in normalised way. The first consequence of the radical difference is that those can be exchanged creating a potential secondary market. Compared to the current world, this would mean that not only commodities but also all kind of goods or services could made available on a secondary market.
But an even more interesting impact of storing those agreements in a digital form is that they can be made directly actionable (at least whilst we stay in a pure digital world). In essence, the details of the services to be provided could be stored in a smart contract. Upon the reception of a the agreed services could be provided without any form of transformation. No invoicing anymore, no payment recovery… Of course, this is not yet possible as most corporations as well as the authorities are expecting regular invoices to be accounted properly. We are not yet ready for a seamless digital supply chain down to accounting, but this is coming.
A side point to mention is that to the contrary of money, transactions are not fungible. This means that each type can embed its own business rules which would be then made immutable. This is can be a great advantage when business rules change overtime but should not been changed retroactively.
The operational costs of this technology are considerably lower compared to the current solutions. As an example, a manual invoice costs in average 20 EUR to be processed, whereas such an automated system costs around 5 EUR to create a smart contract and few cents per transaction. This means that businesses could invoice in a more granular way, limiting the credit risk they take servicing their without being paid.
This is also true for pre-paid services: the transaction costs being low and the chain fully automated, the pre-paid may not need to be worth a lot of money.
Let’s take a concrete example: a data provider company named “MoveData” which is distributing different types of data to its decides to automate their whole value chain. They then create a utility ‘MDTA’ which is going to be used by the to pay for the data they get. The purpose of that is that it can be denominated in a fiat currency avoiding the price volatility normally affecting the crypto currencies. They setup a straightforward pricing model: 1 MDTA = 1 EUR = 1 Data Point. “MoveData” has also created a smart contract for each customer which represents the data each customer has subscribed to. The purpose of storing this information in a instead of doing this off chain is that this information is made fully transparent and auditable to the customer. The customer then credits this smart contract with the MDTA he has purchased.
At that point the system is basically ready to operate based on the information stored in the : a scheduler would look on a regular basis at all the contracts to be served, would generate, most likely off-chain, the data files to be pushed to the . A proof of this file generation would be stored in the payment transaction moving the MDTA from the to “MoveData”.
In this simplistic example, we foresee how core a implementation could be for a company, enabling frictionless interactions with its . This basic example could easily be extended to the providers of “MoveData” which could be managed as well thanks to based information.
As this example shows, using the utility technology, the whole value chain gets seamless and automated from the service description to the payment. A new SAP based?
Published at Sat, 27 Apr 2019 23:30:10 +0000
