How can smart contracts be useful for businesses? (report)

Abstract

Part 1: Smart contracts and uses for business 7Blockchains, distributed ledgers and trust 8Key properties of distributed ledgers 8Part 1: Are smart contracts useful for me and my business?The original blockchain was designed to enable financial transactions without the need for any trusted third party.The design of the system relies on storing records of all transactions on a new kind of database, with a unique set of properties, that engender trust between members of the network in those transactions.In particular, this trust resides in the distributed nature of the database -with every member of the peer network having a copy of the blockchain and equal authority to add to it.With no central copy, every member of the network, or node, can add to the database, though they must reach consensus before doing so -a process typically handled through the use of cryptography and economic incentive.Blockchain databases can be public, so anyone can join, or can have restricted permissions to read or write to the database, depending on the design chosen.Distributed ledgers such as these can arguably underpin trusted exchange of cryptocurrencies or other financial assets in the absence of trusted third parties rather effectively.However, many people are excited by their potential application to other use cases -typically using the immutable and distributed nature of the database to create a verifiable, single, trusted record of particular events.This can open up the possibility of answering some of the challenges that cannot be solved with a centralised database -primarily because businesses would no longer need to trust a single third party to operate the system or database.Examples of how distributed ledgers could be applied include creating a single register for art and collectibles (Codex protocol), guaranteeing the integrity of digital archives (ARCHANGEL) or managing digital music rights (Blokur).When asked to identify the most promising use cases for distributed ledgers and smart contracts, many of the people we spoke to immediately reached for the Open Data Institute 2018 / Technical report How can smart contracts be useful for businesses? 3Open Data Institute 2018 / Technical report How can smart contracts be useful for businesses? 4iii) Identify how the system will be funded and governed, and how value will be transferredAll technology systems and business processes create setup and operational costs.How these costs are administered and by whom will have a big impact on not only trust in the system but incentive to participate.Businesses need to make decisions about the extent to which they can use the technology and the extent to which they can use existing industry mechanisms to tackle these three challenges.In this choice between idealism and pragmatism is the implicit challenge of designing solutions that fit the needs of the business and the industry without losing all the potential benefits of this technological approach.Such a balance is difficult, and businesses need to be mindful about the different approaches that can be taken.Given the reliance on industry context, many systems will require different approaches in response to different challenges, and often these will be a mixture of the ideal and pragmatic. Key takeawaysDaily interactions between people, businesses, and other organisations are all underpinned by trust.Distributed ledgers are an emerging set of database technologies that have the potential to play a part in informing this trust -using their unique properties of immutability and distributed maintenance to create a verifiable, single, trusted record of particular events.Smart contracts are pieces of executable computer code stored on a distributed ledger that, when certain conditions are met, can automatically modify data on that ledger -potentially providing the means to automate different processes within the database.Distributed ledgers and smart contracts are potentially useful for businesses but only if there is a clearly defined use case where there is lack of trust between multiple actors and no central authority is trusted to administer the entire system.Having identified a clear use case, businesses looking to implement distributed ledger and smart contract approaches to tackle challenges need to remain pragmatic about the capabilities of the technology and the existing industry context.Specifically, businesses should be prepared to make decisions about: i) how to get data into the ledger in a trustworthy manner ii) how to handle edge cases and resolve disputes iii) how to fund, govern and administer the system effectively Open Data Institute 2018 / Technical report How can smart contracts be useful for businesses? 5 Open Data Institute 2018 / Technical report How can smart contracts be useful for businesses?6 3 technologies that store data, it is important to understand what role blockchains and distributed ledgers might play in creating a robust data infrastructure. 1Geofrey T Mills (1994), 'Early Accounting in Northern Italy: The Role of Commercial Development and the Printing Press in the Expansion of Double-Entry From Genoa, Florence, and Venice', http://www.accountingin.com/accounting-historians-journal/volume-21-number-1/ear ly-accounting-in-northern-italy-the-role-of-commercial-development