Understanding Smart Contracts – What, What Not and Why?

In legal terms, a contract is an agreement between two parties in which they agree to abide by certain terms & condition and specific procedures, that would hold true under certain situation/cases.

Now the physical contracts has its own set of problems like storage, theft, physical transfer etc. Due to this, digital documents came into play that covered some of the problems of physical documents. But if we talk about contracts, the digital contracts have two main issues:

  • It can be easily copied
  • The validity of signature is questionable

Hence came the idea of utilizing blockchain technology in making and executing an agreement in the form of Smart Contracts. In simpler terms, Smart Contracts are nothing but unalterable conditional codes written in a blockchain network, to perform certain actions, if specific conditions are met i.e. “it this happens, do that”.

Specifically, Smart Contracts are:

– A pre-written computer code/logic that is
– stored on a distributed database of a Blockchain network which is
– executed/run by the same network of computers (nodes),
– and can result in ledger updates like cryptocurrency payments.

As exciting as they may sound, Smart Contracts are just computer logics in a blockchain network. They don’t have a brain of their own (artificial intelligence). In practical scenario, they provide security and reliability to an agreement digitally, but can’t completely replace some of the legal processes of the real world.

-Smart Contracts can’t act completely autonomously: The code of a smart contract is executed only when called upon by a transaction/ message, sent to the smart contract by an external account or another smart contract.

-Conflict Management remains the Same: Handling conflict pretty much follow the same route as with all traditional contracts, i.e. via courts, mediation etc. The main difference will be that in a lot of cases, the transfer of value as a result of automated contract execution had already taken place.

So then, why should an Enterprise opt for Smart Contracts?

The most undeniable truth of the real world is that the things don’t go as planned. Despite both parties have a copy of the original trade documents and they both have a view on the external dependencies of the trade,a disagreement can occur because of one of the following:

-Confusion created due to mismatch between multiple copies of the original trade terms
-A misunderstanding of the initial trade terms
-A disagreement with what happens if the external dependencies changes

Written in a computer code, a smart contract has only one set of trade terms. This is far more concrete than the formal and technical clauses of legal documents, agreed upon up-front. The external factors can be fed in via a mutually agreed feed. The contract remains on a Blockchain, and run when an event happens or when duration of the contract expires. The transfer of value as a result of automated contract execution would take place when the mutually agreed conditions are met.

Sofocle has gained tremendous expertise in developing Smart Contracts as part of various solutions like Supply Chain Finance, Trade Finance and Product supply chain. If you would like to know how Blockchain and Smart Contracts can be useful for your enterprise, contact us.

Blockchain Disrupting Supply Chain Finance

Blockchain, the underlying technology behind Bitcoin has established itself to be beneficial for plethora of industries. To start with, it has revolutionized payments and settlements in the financial domain. Following that, it is impacting other areas of finance like lending, wealth management and insurance. Out of this, Supply Chain financing forms an interesting use case as it is part of Supply Chain Management (SCM) which itself is undergoing major disruption.

Blockchain?

Blockchain is a chain of transaction records in a database like a financial ledger. The transactions are recorded in the database using digital encryption to augment the security. For more about Blockchain, follow this post.

Blockchain adds trust to the network of users owing to features like immutability and transparency.

Challenges in existing Supply Chain Financing process

The traditional supply chain financing process is marred with manual work and inefficiencies. If we talk about Vendor Financing process, it depends largely on the invoice generated by the seller and approved by the buyer which is then submitted to lender for discounting. Since multiple parties are involved each with its own separate database, the chances of fraudulent invoices and double spending of invoice increases.

Secondly, in Vendor Financing, the payments are made to Seller by lender against the invoice whereas the repayments are taken from Buyer. This process is largely offline today increasing chances of delayed or missed payments.

Additionally, Buyer at times take a huge time to approve the invoice leading to delayed financing to the Seller which results in further cost pressure to the Seller.

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Supply Chain Financing with Blockchain

Blockchain along with the use of Smart Contracts can streamline the incumbent supply chain processes.

  1. The Blockchain will centralize the ledger so that information of critical documents like invoices, GRN etc are written securely to Blockchain and accessible to all the relevant parties in real-time.
  2. The payment disbursal to the Seller and repayment back from Buyer can be automated using Smart Contracts that will trigger automatically based on pre-defined events.
  3. SLAs can be written on Blockchain in the form of Smart Contracts to reduce the inefficiencies at various stages leading to timely financing to the Seller.

So, as we see Blockchain helps both the Buyer and Seller to manage their working capital requirements as well as lender to prevent fraudulent invoices and double spending.

Sofocle Technologies has built a Blockchain based solution for Supply Chain Financing. For further details or consultation, Contact Us.

Different Types of Blockchains

Public Blockchain:

Anyone in the world can download the data and read the data. Anyone can participate in the consensus process to write the data or block into the public Blockchain. There are numerous public blockchains. Bitcoin which is a peer to peer currency exchange was the first public Blockchain followed by Ethereum which allows anyone to build smart contracts and decentralized apps on it. Some other examples are Dash and Lisk.

Continue reading “Different Types of Blockchains”

What is Blockchain?

A blockchain is a chain of transaction records in a database like a financial ledger. The transactions are recorded in the database using digital encryption to augment the security.

In addition, the database itself is managed by a network of computers where the ownership of storing and writing in the database resides with no one in particular. This makes the ownership decentralized leading to high integrity and authenticity.

Why Blockchain?

The databases used to store and manage data are controlled by a single individual or organization. Normally there are set of checks defined so that data’s integrity is maintained. But still, there is always a possibility that any individual or organization misuses the privilege to temper the data for its own benefit. This is especially important for databases that store financial or other critical data of customers. Moreover, the data can be hacked and misused by hackers.

This leads to issues of data security, data integrity and data transparency. Now if the database is made distributed i.e. having multiple copies of it, the issue of data integrity can be taken care of. Even if one of the copy is tempered or hacked, the data integrity can be restored using the copies. But in this scenario, how do you manage the new data entries? Not everyone with a copy of the database can be given right to make new entries to database. This will put all the copies out of sync leading to data corruption.

Here Blockchain comes to the rescue.

How Blockchain Works?

Blockchain operates in a network of computers where each computer is a node and has a complete authenticated copy of the database.

Each node potentially has an option to write to the database. When a new transaction is made in the network, a consensus protocol kicks in based on which the node who will write the transaction is decided. Since all nodes have equal opportunity to be the node selected, it decentralises the control.

A number of transactions are clubbed together to form a block and that block is added by the node selected for the purpose. While adding the block, a reference of the last added block is added to it creating an ordered chain called Blockchain.

Blockchain’s distributed and decentralized consensus model makes the data secure, transparent and authentic.