Technology is an ever-moving target. That’s how I’ve described it to my children, adding that it’s also one of the most demanding working environments, because every few weeks or months you need to understand and account for new technologies changing the nature of IT.
In other industries, such as the medical profession, it’s very seldom that a large shift in fundamental knowledge or understanding occurs. It’s like the medical industry is an ‘append only learning’ method, meaning information is primarily added onto a base of founding principles.
However, the benefits of technology being a fast-paced environment are that new opportunities to combine methods or technology occur almost daily. One such combination is Narrow Artificial Intelligence for contract detection and analytics, brought together with the ‘underlying idea’ of smart contracts, or the encoding and execution of contractual data and events on a programmable blockchain.
The reason I referred to the ‘underlying idea’ of smart contracts is that, in practice, smart contracts may not fully deliver on all that they promise. Gideon Greenspan points to some of the technical limitations and challenges facing smart contracts. Other writers also challenge the usefulness of the data or functions encoded, and how it all gets accurately encoded onto the smart contract.
This does not mean that the underlying idea behind smart contracts should be dismissed. There are multiple approaches to the creation of smart contracts to overcome the challenges, including combining Narrow Artificial Intelligence for the detection and extraction of information held within physical contracts, and once extracted, encoding this data onto a blockchain.
This approach is far more intelligent and extendible than smart contracts, as they are currently defined, and as a result, I prefer to refer to Intelligent Contracts. The intelligence comes from the ‘I’ in AI, where a system is taught to continually and consistently recognize and extract key information from contracts. With active learning based on users’ responses, both positive and negative, to the extractions and predictions made. This is very different than current ‘smart contracts’, but it still uses some of the underlying methods of blockchain, and their extension, to store immutable information or actionable events within a block.
You may ask why more solutions don’t use Ethereum, the programmable and public blockchain infrastructure launched in 2014, and leverage its concept of smart contracts. The answer is that, while Ethereum does provide some of the building blocks required, it has many limitations for the definition of Intelligent Contracts, including security, extensibility and performance.
To effectively create an Intelligent Contract, you must encode much more information on the blocks (extensibility) in a highly secure method, and the only real way to provide this currently is within a private blockchain solution.
The value of Intelligent Contracts
So now that we’ve discussed the concept of Intelligent Contracts, and a bit about how to create them, it’s just as important to cover the why. Why are they so important? Why do I need them? Why should I care if I don’t have them? To answer these why questions, let’s take a sample customer, a large international IT / Software company that has acquired different companies or business units over many years.
Let’s say, company X has over 16 different contracting solutions, on both the buy and sell sides of their business, with no standard reporting on contracts. They continually sign ‘Master Agreements’ in different locations or departments, and allow all global entities access to discounts, once negotiated levels are reached or exceeded. This is a very common challenge with larger organisations.
You can immediately see where a ‘smart contract’ could be used to encode the master agreement’s key performance indicators (KPIs) onto a blockchain. Then automatically apply the discounts across all departments. But if this business is using different systems, and no single or consistent method to track and report on new contracts being created, signed, or agreed to on (potentially) 3rd party paper, how will they extract the required information?
Intelligent Contracts become a solution because they provide consistent information detection and extraction across all entities, and because they are non-intrusive, Intelligent Contracts can work alongside existing solutions providing an overall layer of intelligence.
Blockchain: The single source of the truth
If we take this idea a little further, past the encoding of actions and the combination of parties and events; we can see how this solution provides companies with a ‘single source of the truth’ within contracts. As a contract placed onto the blockchain has been agreed by both parties, why not share the same information between parties – as a single entity with continually updated contract terms?
Some may conclude that companies placing details of actual contracts onto a public blockchain might soon run into issues of security and scalability. Security, because every person on the blockchain can see the transactions that occurred, and scalability, as block size is limited on public blockchains for many reasons, not least of which is performance.
With blockchain, the larger the block or blocks, the longer it takes, and the more processing power is needed to reach consensus (e.g. the process used by a group of peers responsible for maintaining a distributed ledger to reach agreement on the ledger’s contents.) To this end, it should be clear that a public blockchain or smart contracts system is unlikely to meet the requirements of many organisations for contracts.
The best solutions have found a solution to the security and scalability challenges with blockchains. With Intelligent Contracts using private blockchains with algorithms to ensure no single system controls the creation of the blocks, leading to immutable and distributed consensus.
As the chains are private, the issue with sizes of blocks is removed, and security can be implemented at many different layers, including HASH-only and PKI key-level security for access to information encoded on the blockchain.
The use of the private blockchain also allows for the system to provide Know Your Customer (KYC) functions, as each entity within the system would be required to be known as they are a party to, or have an interest in, a contract. They can all participate in the creation of the blocks, as each entity is known and trusted.
With all the differences, it's clear to see why Intelligent Contracts and not smart contracts are what enterprise customers need.
I have written about this topic for over a year and since then, some blockchain solutions have already added levels of security to account for the short comings I’ve identified. IBM and it's hyperledger as an example, now provide a granular level of security and control needed for intelligent contracts on a public ledger. In addition, companies have taken the smart contracts logic execution off chain and the consensus methods have changed to allow more information to be handled better. So a convergence of public chains and intelligent contracts is starting.