Smart Contracts

Smart Contracts

The transparency of events along the supply chain via the Blockchain is itself a major enabler of faster payments and improved financing, increased efficiency, reduced risk of fraud, and lower costs. Exchanging information related to these events in a distributed ledger facilitates trigger events that need to take place for goods to arrive at their final destination and for suppliers to receive payment. But the capability of the Blockchain to facilitate these trigger events does not end with the mere exchange of information along a supply chain.

The use of smart contracts to not only trigger events but actually carry them out automatically represents a bold evolution that is being actively explored by a few today. Smart contracts are self-executing computer codes that automatically carry out functions once a triggering event has taken place. It is a linear contract that can include multiple parties (investors, borrowers, buyers, sellers etc.) and that cannot be altered (EBA Association,2016).

For example, if a smart contract is written between an invoice seller and an invoice buyer to say that once the invoice buyer is victorious in a crowd funding process, 80% of the funds will be released to the invoice seller, a smart contract would automatically disburse payment once confirmation is entered into a distributed ledger that the crowd-funding process as closed. The confirmation of approval by the crowd-funding process is not a triggering event requiring action by a bank the payment is automatically made once confirmation has been entered into the system.