Smart Contracts Are Creating Important New Business Opportunities

The hype behind smart contracts is that they will reduce the need for traditional contracts, the expensive lawyers who prepare them and the costly lawsuits to enforce them. A more realistic and optimistic view of smart contracts is that their unique nature and complexity will significantly expand the opportunities for coders, lawyers, and other business entrepreneurs rather than destroy them. Already industrious new ventures are popping up around the world to address the various technical and business challenges created by smart contracts.

What is a smart contract? It is software code on a blockchain implementing the terms and conditions of an agreement between parties. The code can implement any contractual situation. For example, if-then statements are used to code conditions to trigger performance (“if a happens, then b”). Once the code is switched on, it automatically executes on the blockchain. In theory, there will be no need for courts to enforce smart contracts because when the relevant triggering event(s) occur, performance automatically happens. One simple example of a smart contract is a mortgage coded in software: “If it is the 15th of the month, then transfer $2000 (in cryptocurrency) from smart wallet of homeowner to the bank.” Similarly, a smart contract for a movie rental might look like “If movie viewer transfers $20.99 (in cyptocurrency) from his/her smart wallet to movie streaming service, then movie streaming service transfers 5 movie rental tokens to the movie viewer account.”

These simple examples belie the complexity, difficulty and expense associated with deploying smart contracts on a blockchain. Smart contracts act like magnets for hackers and are proving to be very difficult to completely secure. Further, a fundamental feature of blockchain technology is that once data has been written to a blockchain nobody, not even a system administrator, can change it. While this features makes smart contracts desirably tamper-resistant, it also means that they can’t be reversed if something goes awry. Therefore, a smart contract must be “ironclad” prior to deployment. A further challenge relates to the reliance on off-chain events as a condition or consequence of performance. Smart contracts must be designed to receive or output information from or to off-blockchain sources, a non-trivial task.

These complexities are creating substantial business opportunities for new ventures to take up the challenge of making widespread use of smart contracting a reality.

1. Smart Contract “Templates” With User-Friendly Interfaces

Because of the difficulty and expense associated with deploying a smart contract on a blockchain, there is a significant opportunity for companies that are able to develop “ironclad” smart contracts templates with simple user interfaces. These templates can be used over and over again for different instances of the same or similar transactions. Returning to the mortgage smart contract discussed above, companies will expend substantial R&D costs to develop impenetrable mortgage smart contract templates that can be used by any number of financial institution wanting to grant a mortgage. Not unlike the mortgage calculators found on the web, the financial institution will deploy simple, easy-to-use web-based graphical interfaces to enter the loan amount, interest rate, term, collateral/deed terms (using drop down menus), account information of the borrower, etc. to create the mortgage smart contract.

Aggressive companies will expend the time and money to establish themselves as having the most secure, most user-friendly smart contract template for a particular industry/transaction. These companies will leverage their expertise in particular industries to make their solutions tamper proof. OpenZeppelin and Agrello are ventures in engaged in the development of reliable smart contract templates.

2. Smart Contract Auditing.

Given the security concerns of smart contracts combined with the fact that smart contracts, once deployed, are intended to be immutable, a smart contract audit must be performed prior to deployment.

A smart contract audit is the process of carefully analyzing the software code of a smart contract to find bugs, vulnerabilities and risks before the code is deployed on a blockchain (where it won’t be modifiable). An audit usually includes at least the following steps: (1) verifying a smart contract against a library of known issues; (2) validating the contract performs the logic it was intended to perform; (3) confirming there are no security issues; (4) performing a gas analysis of the contract (fees to run the contract on ethereum) to ensure that the users do not end up spending unnecessary Ethereum transaction fees; and (5) preparing a detailed audit report as a certification that the smart contract has undergone a rigorous audit documenting each function in the contract and how it is performing.

Smart contract audit companies have begun to spring up around the world to perform this auditing function. Hosho Group and Zeppelin Solutions are a few of the leading smart contract auditors.

3. Oracles.

Like traditional contracts, smart contracts often depends on inputs from the outside world as a condition for performance under the smart contract. For example, consider a sports betting smart contract. Information such as the point spread, the over/under and the outcome of the game/event will have to be input from an off-chain source to the smart contract distributed over the blockchain. The parties to the contract must agree upon the trusted source of the off-chain information and how it will be supplied to the contract.

Algorithmic platforms, known as “oracles,” are being developed to feed information from the outside world into the ledger to perform the data-input function. The outside actor must be a trusted third party and must preserve the integrity of the smart contract by transmitting accurate and trustworthy data in a secure manner. SmartContract, a San Francisco based ventures, designs oracles as part of its business.

4. Trusted Third-Party Enforcers

Parties to a smart contract may also intend that the performance under the smart contract affect the outside world. For example, a complex smart contract may call for physical assets to be moved, such as gold or funds held in a bank, upon the occurrence of some event on a blockchain. Consider a smart contract for the sale of a house where someone other than the selling party is living in the home. When the house is sold, the people currently living in the house must be notified the sale and asked to vacate the premise. The smart contract could include software code that sends out a notice to specific recipients upon the consummation of the sale. However, without the involvement of a trusted third-party, enforcement of the sale — i.e., causing the house to be vacated — will be ineffective by the smart contract. Judges or sheriffs fill the role of enforcing natural contracts. In the smart contract setting, it is anticipated that the contracting parties may engage the services of a specific trusted third party to effectuate the intent of the agreement. For the lack of a better term, these trusted third-party enforcers could be called “Callahans” or “Eastwoods” for obvious reasons.

In sum, smart contracts are complex instruments that present unique challenges. These challenges are creating substantial new business opportunities for industrious entrepreneurial ventures to pursue. These new businesses will speed the ultimate adoption of smart contracts into the mainstream.

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