Bitcoin in Business: Smart Contracts

By Oct 13, 2015 4:00 PM EDT



Blockchain technology has the potential to drastically change the way business is done, mainly in accounting and contracts. Large businesses make contracts on a daily basis. Contract law is a wide field of study and essential to understanding how to run a successful business. What happens if the other party breaches a contract? Does a contract need to be in writing to be legally binding? These are things business owners and decision makers need to know. Smart assets are not widely used in modern business, but the benefits of integrating them greatly exceed the low cost of implementing them.

Also read: Colored Coins, What They Are and How They Work On The Bitcoin Blockchain

Bitcoinist_Dow  Jones DecentralizationUsing the blockchain, businesses can create and complete contracts that are stored on the public ledger permanently. Here’s an example of how a contract regarding the sale of goods to one party to another would take place using blockchain technology to cryptographically prove transfer of ownership:

  • Company X wants to sell an asset to Company Y. For simplification, we will assume that Company X purchased the asset directly from a manufacturer and it was new at the time of purchase. Here are the steps in order to create a “smart contract” using blockchain technology.
  • Company Y generates a random number and asks Company X to send data about the asset.
  • Company X assigns the asset the random number generated in step one and returns a data signature signed with the assets unique ID key. The data contains all information about the asset and the random number generated by Company Y. The public key of the current owner is also given to Company Y so that they know what they are getting and that it’s coming from Company X.
  • Company X selects a key to receive payment for the asset, k1, and names their price which is defined as P.
  • Company Y generates a new ownership key, k2.
  • Company Y creates a transaction with two inputs and outputs. Input one signs for P coins, and the second input connects to the output holding T coins for the ownership address, The first output sends P coins to k1 and the second output sends T coins to k2. The transaction is not valid because only the first input can be signed and verified. Company Y passes the partially completed transaction to Company X who then signs the second input with the asset’s current ownership key and broadcasts the transaction.
  • Both parties wait for transaction confirmations.
  • The transaction cannot be reversed and ownership of the asset has been transferred from Company X to Company Y.

If this seems complicated, it’s because it is. Transferring ownership of assets or creating smart contracts is currently a very technical process that requires immense knowledge of Bitcoin and blockchain protocol to successfully complete. Smart contracts through Bitcoin’s blockchain aren’t widespread due to the lack of understanding and the difficulty involved in using them. Applications like Colored Coins will likely have a large impact on smart contracts and representing assets on the blockchain. When the process is simplified, more businesses will be likely to use and implement blockchain technology into their daily operations and contract management. Unlike centralized data solutions, storing contracts on the blockchain ensures that data is distributed and protected from things like fire, flood, and other disasters that could wipe data or destroy facilities. As it becomes easier to create smart contracts and store tokens that represent assets on the blockchain, more businesses will likely turn towards the technology due to the incredibly low cost of operation and increased security.

What do you think about smart contracts in business? Let us know in the comments below!


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Originally posted on: Bitcoin in Business: Smart Contracts


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