Blockchain-enabled smart contracts: what they are and what they mean for blockchain development

Cryptocurrencies and other blockchain applications make headlines, but smart contracts play a vital role in enabling blockchains to communicate and share information effectively.

Whenever a technology emerges in the broader enterprise market, there will almost always be some ambiguity and confusion as to how exactly these technologies work. Even with all the investments, discussions and attention that have been paid to the blockchain and cryptoasset sector, there is still some ambiguity as to exactly how an implementation project should proceed. It is clear that every organization is different and that every blockchain implementation will proceed differently, but the importance of smart contracts is something that exists in every situation.

Without being overly technical, a solid working definition of what a smart contract is can be broken down into two general components. First, a smart contract is a blockchain-powered representation of a traditional contract, complete with the counterparties, rights, obligations, and consideration transferred between these counterparties. Second, these smart contracts allow the execution of some or all of the contractual rights and obligations with less humane supervision and management. In other words, smart contracts can automate at least some of the contract fulfillment activities that currently require human supervision. The contractual terms and conditions are written directly into the underlying blockchain code, helping to increase the integrity of these terms and conditions.

Taking a step back for a moment the following becomes clear; Smart contracts are the application that enables and optimizes the ability of blockchains (regardless of specifications) to interact with other blockchains or other technological systems. Smart contracts, in other words, play a vital role in how blockchain projects can generate the efficiencies and gains so often discussed as reasons behind implementation in the first place.

It all sounds like a relatively simple process and good news, but let’s take a look at some considerations that can complicate the smart contract conversation.

Coding and contracts. One of the first weaknesses that can emerge in the smart contract dialogue is the initial translation of traditional contracts into a code-based contract. In essence, a traditional contract that is written (both physically and digitally) must be translated into a series of executive statements that can be coded and executed on a digital platform such as blockchain.

As this process will, by default, involve legal and technical experts, it is important to ensure that the meaning and nature of the agreement are not lost in translation.

Flexibility versus stiffness. The purpose of any contract or agreement is to provide guarantees on the terms, conditions, rights and obligations of the parties involved. Furthermore, the contracts outline the measures that can be taken in the event that one of the parties involved violates the agreement. That said, and as any business person knows, things often change over the course of business which may require contract terms to be fine-tuned and adjusted over time.

Smart contracts need to balance the need for consistent applicability while at the same time building some measures and access points to allow flexibility in the face of changing business conditions.

Contractual checks. While this point is listed last in this conversation, it should also be a topic and idea that permeates every smart contract conversation. Whenever a new technological process is layered or incorporated into existing processes, special care must be taken to ensure the integrity of the underlying process. In the case of smart contracts, it might be tempting to put an internal control conversation on the back burner; Since blockchains have proven tamper resistant, why bother with controls?

In fact, as the automation and augmentation of existing processes, whether driven by blockchain or not, continue to accelerate, the importance of robust, business-oriented controls will increase and become more important. The slew of hacks and data breaches that have occurred, or were at least partially generated due to lack of controls, underscore the importance of these considerations.

Smart contracts and associated discussions may not generate the headlines and discussions that other blockchain and cryptocurrency news do, but they have an important role to play in maturing the industry. Understanding the potential challenges and opportunities associated with this blockchain application is a responsibility that any business professional planning to implement blockchain should be aware of moving forward.

Data integrity, efficiency and transparency are at the heart of any blockchain project; Smart contracts are the often overlooked tool that makes these benefits possible and achievable