HomeGuideA Guide to Smart Contracts for Online Service Providers

A Guide to Smart Contracts for Online Service Providers


The internet revolutionized how business is conducted. Increases in speed, efficiency, and reliability have given way to a diverse landscape of online businesses offering their services up to the public. Online startups and corporations alike rely heavily on automation to make their lives easier and give them the capacity for growth. Could blockchain be the next technological revolution in business automation? Smart contracts have already processed over 6 billion dollars in blockchain funding in 2018. But they could lower costs and automate processes for online businesses in a variety of sectors. As the Internet of Services (IOST) prepares to release a blockchain platform for online services, we take a look at how smart contracts could change an industry.

What are Smart Contracts?

Smart contracts are the next big thing in automation. Based on blockchain technology, often on the Ethereum platform, they are computer programmes that store and enforce the terms of an agreement using IF/THEN instructions. An example — if party A uses a software app for more than five days then party B receives X dollars. The payment would be frozen, or “in escrow,” on the blockchain until the contract received the trigger it needed (party A using their software for more than five days) for funds to be released. This simple instance of smart contracts would ensure swift payment after the software’s trial period, as the funds are produced “up front.” It also means no external payment processor is needed, reducing fees, with the security of the transaction guaranteed by the blockchain. Smart contracts can be programmed to take a number of triggers including signatures, passwords, payment receipts, and barcodes.

The history

The term “smart contracts” was first used by blockchain innovator Nick Szabo in 1996. Szabo created Bit Gold — described as “the giant on whose shoulders Bitcoin sits” — and he has been a key figure in blockchain’s short history. But the “digital vending machine” that Szabo described didn’t become widely used until the Ethereum team developed it to run on their platform. Smart contracts have been widely used for fundraising in the blockchain space since, with over 11 billion dollars raised through ICOs (initial coin offerings) from 2017 onwards. ICO contracts take payments from investors then release them to a company once their pre-programmed funding goal is met. Crowdfunding websites would manage this process for a fee but smart contracts can do this automatically with better security than a website could guarantee. Businesses in diverse sectors are seeing the success of smart contracts in the investment space as a sign of its promise in other domains.

Smart Contracts: The benefits

Smart contracts offer a number of benefits to businesses. They enable trust on both sides of a deal because the terms can be written into their code. They offer security; the blockchain is unhackable so no one can intercept or pinch contract funds. But their biggest practical advantages are in efficiency and cost. Smart contracts are self-executing, making it difficult for parties under contract to go back on their word. If a business deals with a lot of late or missed payments from clients, smart contracts could be used to enforce payment once the conditions of an agreement are met. They also eliminate the need to involve costly third-parties in a variety of processes. Not just payment processors but escrow services, lawyers, and banks could all be bypassed where third-party validation is typically crucial. In real estate alone, an escrow service may take up to 2% in a property transaction — savings could be in the thousands.

Smart contracts for online service providers

Many online service providers face similar issues when it comes to asset management and payments. Automated payments to employees, suppliers, and other partners could be a big advantage, especially when amounts are dependent on external factors like video views or product purchases. Microsoft is already testing smart contracts that pay royalties in the right amounts to the creators of a game. But it doesn’t stop there — the same contract could also signal the manufacturer to create a new copy of a game when a purchase is made, or trigger another contract to move copies to a particular location if in stock. Companies such as Alibaba and IBM are already using smart contracts within their supply chains. For digital-only businesses, this promises to be hugely beneficial. When a particular function is used by a software or web application, smart contracts could be utilized to allocate more resources to it — or they could award the creator of a video the funds to create a new one once it reaches a certain amount of views. As people begin to create more complex contracts and use multiple smart contracts together, they could automate assets, payments, and even human resources for entire decentralized online companies.

The future

For now, the biggest barrier to wide smart contract use is scalability. Processing data for thousands of online businesses would require a significant degree of computing power. And on Ethereum, capacity and speed are limited. But the future of blockchain is around the corner. As projects like the Internet of Things (IOTA) and the Internet of Services (IOST) show impressive results, it seems capacity and speed will soon no longer be an issue. This could mean entire decentralized companies run on smart contract technology — processing payments, transferring assets, and managing day-to-day efficiencies in a secure and distributed way. The Gartner research group certainly thinks so. Their annual report estimated that by 2022, smart contracts will be used in more than 25% of global organizations. It may be time to begin exploring how smart contracts could work for your business.

About the Author:

Simon Manka serves as Growth Lead at the Internet of Services Foundation (IOST), a next-generation blockchain infrastructure that is decentralized, open source and neutral. He has been a blockchain enthusiast since 2013 and is committed to the creation of a vibrant decentralized economy. You can find Simon on Twitter.


The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.

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