How to create value using ‘Smart Contract’ innovation on Blockchain
Updated: Jan 8, 2022
A ‘smart contract’ is an agreement executed on a Blockchain. It does not require a centralised system, a third-party mediator or intermediaries to action the contract execution. It is a contract written as a computer code on the Blockchain that computers or nodes (a system or devices connected to a network) execute through triggered events.
Blockchain is a decentralised infrastructure (database) that is not controlled by a central company, institution, government or individual. All transactions are arranged into chunks of data called blocks. These blocks link to one another. Thereby forming a chain of blocks or a blockchain.
Once the computers or nodes execute the smart contract, they update the Blockchain distributed ledger. A distributed ledger or open ledger is a database that is accessible online for anyone to see. It is consensually shared and synchronised across multiple sites, institutions or geographies.
To explain smart contracts, let us use email marketing as an analogy to convey its mechanism. Premium email marketing is incredibly sophisticated and heavily automated. The more personalised and targeted the email is, the more sophisticated the data science behind it has to be in order to ensure that the recipient receives tailored messaging that resonates, resulting in the desired call to action being taken by the target customer.
To achieve this, the organisation invests huge amounts of resources and expertise to learn, gather and store customer data. Obvious information such as the customer's name and address is stored. However, other information such as customer purchase history, purchase channels, purchase behaviour, sentiments (easily captured via social media platforms and correspondences with the brand via telephone or email etc), preferences, location of purchases, purchase patterns, the value of purchases, and demographic information (e.g ethnicity, gender, age, education, profession, occupation, income level, and marital status) that the customer has freely given, or that the brand has learned about the customer over time through voluntary means such as through the use of store cards and membership cards etc, are also captured and stored.
All of this data can be harnessed to ensure that the email messaging the customer receives is personal, contextual and relevant to that individual in that specific moment in time and addresses a specifically identified need or want. This is very much a science. Data science to be precise. When done right, customer engagement is exponentially increased which can ultimately translate into an increased purchase. Over the years, Customer Relationship Management (CRM) platforms and tools have become incredibly powerful and can automate much of the data planning and data science activities to enable effective and targeted emails to be deployed to the customer quickly and cheaply. The analytics (performance results) can be displayed in easy to view dashboards for campaign performance tracking and optimisation. Over time, this process has become much more automated and the cost continues to decrease.
Smart contracts are promising similar outcomes. Let’s examine the parallel between smart contracts and email automation a little more.
Brands spend significant marketing efforts creating strategies to enable successful campaign activation and to drive customer footfall and online purchase. Various channel strategies are developed to ensure cohesive omnichannel engagement. However, for the purpose of this illustration, we will continue to focus on emails as it best expresses the comparison being made with smart contracts.
A simple email campaign plan may look something like the following:
The brand activates campaign awareness as part of a new product launch, the target customer signs up or opts in to receive email communication at the point of purchase in-store or online. The data is stored in the CRM database. The first contact email is triggered and it is deployed after a preprogrammed number of days (or hours). The messaging is light and welcoming. Remember, the brand is building a relationship at this point. It still wants to learn more about that customer. The email may have a special offer discount or promotion for new customers, or it may simply ask the customer to take a redefined action to receive a benefit of some sort. The outcome of the customer's decision at that point has already been designed. For example, if the customer takes up the prescribed offer, that data is recorded and stored and the next associated email will be triggered to be deployed at a predefined interval.
If the customer does not take any action, a related email for those who did not take the designed action is also lined up to be deployed at a predefined interval. The second, third, fourth, fifth, sixth, seventh and beyond emails have all been designed to be deployed based on the customers’ decisions. Decision trees are a good visual illustration of this process. These initial predefined engagement emails have a campaign duration and an end date. However, once the campaign ends, all of the acquired engagement data is stored in the CRM database and leveraged for future campaigns and initiatives. The customers can then be bucketed in various categories and targeted differently based on whatever filter is deemed appropriate to achieve the strategic goals of new campaigns, initiatives and programs.
The main takeaway from the above is the automated activities - the triggered sequences of events that are released are based on the actions of the customer. In other words, if (the customer) do this (executes a predefined action designed by the brand), then (the brand) does that (triggers an associated action designed to further engage the customer). It is known as the If This Then That (IFTTT) conditional statement.
A smart contract is simply - If This Then That (IFTTT) conditional statement logic programmed onto the Blockchain and run by all the computers and nodes on that system which then automatically updates the transparent or distributed digital ledger. For example, if a computer code (smart contract) is created on the Blockchain and the specified triggered event occurs, it will then execute the next sequenced action. That could be to send the digital contract to a predefined person’s email address for their signature to authorise or to make a legally binding agreement. That person will receive the digital contract and electronically sign it.
The signature acts as a trigger to execute the next action programmed into the smart contract code on the Blockchain. This can easily become a complex matrix of decision tree logic. This mechanism is widespread in online advertising. Ad servers are programmed to make automated decisions based on set variables in order to determine the right ad to present to the end-user in order to encourage the desired user behaviour. The first action sets in motion a domino effect, a pre-existing event that triggers the subsequent events. These are all incrementally and logically executed.
Another example to explain the smart contract is the process of using a vending machine. Action one: a person inserts money into the vending machine in order to make a purchase. Action two: the inserted money triggers the subsequent event where the vending machine enables the customer to key in the code for the item they seek to purchase from the vending machine. Action three: the customer keys in the code for the desired item. Action four: the vending machine executes the order and releases the product whilst simultaneously releasing any due change due. Action five: the customer collects the purchased product and any owed change. The transaction is successfully completed. Both parties are satisfied.
To better understand the value of this technology for consumers, let’s explore a couple of potential use cases, such as buying a car and purchasing a property.
The current simplified scenario for a car purchase looks something like the following: customer goes online, find a car that they like, makes an appointment to see (and test drive) the car at a dealership. The customer likes the car and eventually agrees on a purchase price after some negotiations. The customer explores a range of loan options and eventually arranges finance with a lender to pay for the vehicle at an agreed monthly repayment plan. Contracts are signed, ownership of the vehicle is transferred to the customer and finally, the car is handed over to the new owner. This process can take a few hours at the very least or a few days in some instances (depending on the circumstances of the buyer).
Now, let's imagine how this same scenario plays out using a smart contract.
In the future, vehicles that are for sale are uploaded onto the Blockchain. The ownership and full details of the vehicles are visible on the Blockchain including the asking price. A customer sees a vehicle on the Blockchain and wants to purchase it. A smart contract is in place on the Blockchain to enable real-time execution of the purchase process of the vehicle. The customer decides to pay for the vehicle using cryptocurrency or digital token. With immediacy, the ownership of the car is transferred to the customer in real-time with no lag in the process as soon as the required payment is made.
Every single required offline process is automatically executed digitally on the Blockchain without the need to employ third parties. This could include but is not limited to securing finance for the car at the best possible rate for the customer in question, and purchasing insurance. The ownership and details of the transaction are executed on the smart contract. In an instant, the customer now holds the ownership of the vehicle as their digital identity on the Blockchain ledger (database). Every single computer or node that is part of that Blockchain ecosystem automatically and instantaneously updates the distributed ledger so that everybody on that network knows who the new owner of the vehicle is.
Let’s examine another use case. In this scenario, a customer wants to purchase a property.
The current simplified scenario for purchasing a property looks something like the following: customers identify a property that they want to purchase, seek a loan from the bank, source a mortgage broker who can apply for a loan and navigate through the complexities of property purchase loans, the bank qualifies the person through an extensive and rigorous process of credit checks, risk assessment and so on, a lawyer is hired to execute the complex legal processes involved and to correspond with the seller's lawyers and various other entities and so on.
Now, let’s imagine how this same scenario could play out using a smart contract. In the future, the scenario could play out as follows:
Properties that are for sale are uploaded onto the Blockchain with confirmation of the current ownership, asking price and all the other necessary and associated information. Every single process required to purchase the property is recorded onto the Blockchain. The customer sees the property on the Blockchain, visits the property and goes through the individual and personal decision-making process and eventually decides to purchase the property. The customer puts down the required deposit using cryptocurrency or digital token. Automatically, the smart contract executes it and it triggers the opening up of all the information concerning the house that a lawyer would normally manually seek out over several weeks or months in the traditional purchase process. The smart contract automatically verifies the accuracy of the presented information. As such, no third parties or intermediaries are required. The customer can simply proceed to conclude the purchase in real-time.
The idea can be extended to multiple-party equity purchases on a smart contract that sequentially executes every event towards the successful completion of the purchase. This can be seen as multi-signature buying (e.g. a group of people banding together to make a purchase and share the equity between them). Should an individual wish to sell their equity - they can do so via the smart contract mechanism. Should the group choose to sell the entire item, they too can do so (as legal owners) automatically via the smart contract multi-signature selling.
On the Blockchain, you can create something known as ‘digital identity with social credibility. The idea is that the more a person is trustworthy due to their reliable credit history (especially on the Blockchain) because they regularly and consistently honour their repayments as specified within the smart contract (e.g. paying rent and loans on time, being a responsible tenant etc over several years), the more their social credit rises. A person with strong social credit will have a lot of leverage to get better credit, a loan or reduced cost for their rent payments and so on.
These are some basic use cases. However, the potential and the opportunities are vast. Over the coming months and years - and as the public awareness and appetite grow for better products and services that are convenient, transparent, cost-effective and that will ultimately add value to their lives - they will flock to these new Blockchain-based services and products. The challenge now is to develop viable, sustainable and profitable smart contracts value propositions and business models that are innovative and solves acute customer pains.