Blockchain has become the IT buzzword in recent years, with hundreds of new companies rushing to create products and services based on the decentralized technology. With the amount of attention blockchain-based companies have been receiving, ranging from wide news coverage to massive valuations, many have overlooked one of the technology’s most valuable building blocks: the smart contract.
Most startups focus on blockchain’s security features like transparency, fraud resistance, and hack-proofing. However, smart contracts form the basis of what could be the next frontier for tech startups: an automated solution for transactions that could eliminate human error from negotiations, labor disputes, and even intercorporate agreements. Smart contracts have wide-ranging use cases, and can be a major focus for driving the startup ecosystem around blockchain in the future.
However, until recently, smart contracts were used as a foundation, not a feature. Most blockchain-based technologies employ them, but as a tool rather than the focus of their services. Now, recent changes in several state legislatures, alongside easier accessibility, could create a boom in smart contract-based services.
Smart contracts gain steam
Until the real adoption of blockchain, most startups still provided services that used traditional contracts, even in digital format. More important, services and transactions were still tied to human input. While this system is not inherently bad, it does lend itself to some issues, as several “fat finger” errors have shown in the past. One of the biggest appeals of smart contracts is the automation they bring to transactions and negotiations.
For startups, the ability to build systems based on this automated paradigm lets them create more complex systems that are less likely to fail. Moreover, the applications are not limited to legal negotiations. Smart contracts have and can be used for a variety of transactions, ranging from simple peer-to-peer exchanges to complex negotiations and even corporate interactions.
Thanks to blockchain, the technology also adds a degree of transparency that regular contracts cannot match. One major issue negotiations have is the potential for manipulation or breaking agreements over wording or vague clauses. The nature of blockchain ledgers is appealing to startups working with smart contracts because they create a non-alterable proof of agreement across the entire chain. When a smart contract is entered into the system, it is instantly updated on the public ledger across all nodes.
Another major component of this transparency is automation. Because smart contracts are lines of code, they are triggered and executed automatically when specific conditions are met, eliminating human error from the equation. This has wide applicability for contractual negotiations and even for areas such as payroll, rent agreements, commission-based sales and more.
Most important, perhaps, is blockchain’s connection to cryptocurrency. Major coins such as ethereum and bitcoin are becoming more mainstream, but are still limited by the number of providers and businesses that are willing to transact with them. However, smart contracts could lead to wider adoption, helping startups potentially benefit in a major way.
Some companies have already started working on solutions that offer smart contracts to companies that do not necessarily operate on the blockchain. New startup Jincor, which will issue an initial coin offering at the start of November, has created a platform that delivers business-to-business smart contracts that can be transacted in bitcoin and other cryptocurrencies. The key part of their service is that companies are not required to operate on the chain, but rather simply use the company’s platform to create enforceable, automated smart contracts.
“Functional facilities of the platform encompass several conceptual blocks, including messenger for safe and authorized corporate communications, smart contracts templates for managing e-document flow, and cryptocurrency transactions. The process of issuing a smart contract on the base of the Jincor platform is as simple as filling the form of registration on a website. The Jincor ecosystem includes an arbitrage option, which allows companies to settle disputes on a decentralized level, as well as a range of other financial instruments (loans, letters of accreditation, escrow), that tremendously simplify the process of B2B interactions,” wrote Vladislav Kirichenko, the CEO and cofounder of the platform.
Tech startups are paying attention
For startups, smart contracts offer a different way to approach their problems. Already, several states have passed legislation that recognize smart contracts as legally binding agreements, a major step in broader acceptance. Arizona has even amended an existing law regarding digital contracts to include specific wording that adds smart contracts as accepted agreements. The result has been an influx of blockchain-based startups into the Arizona economy, helping cultivate a new innovation hotspot in the Southwest U.S.
Most important, however, legal recognition gives startups the confidence to base their services on smart contracts knowing that customers will be able to use their platforms without worrying about enforceability. For many companies, this has remained a major impediment to wider use. It also opens a new series of industries to potential disruptors.
With better acceptance comes a broader potential for use cases, letting startups in the tech sphere do what they do best. With the backing of a transparent and ironclad agreement, alongside clearer arbitration methods and automated transactions, smart contracts deliver a powerful new tool to startups.
With that in hand, entrepreneurs could start a new wave of disruption that will create a better, more transparent ecosystem across many industries. From banking, investment, and even business-to-business transactions, smart contracts are a key innovation that could open the doors to more mainstream acceptance of blockchain.