Smart contracts, among other things, are a fascinating product of blockchain technology. For the uninitiated, a blockchain is a chain of blocks that together make up a distributed ledger, which, in turn, is accessible to everyone on the network.
Blockchain technology is almost a decade old, and several early Blockchain adopters used it to date and time stamp electronic documents. But the ultimate goal was to protect digital contracts from forgery and tampering.
If this intrigues you, read on. In this article, we explore how blockchain when paired with contract management software helps streamline contract lifecycle management (CLM). So, let’s get right to it!
What is contract management software (CMS)?
A CMS is an all-inclusive platform with all the features required to manage a contract lifecycle—be it with a client, an employee, or a vendor.
At a time when technology is redefining the way companies do business, contract management solutions have undoubtedly emerged as the hero of the hour. By streamlining workflows, a CMS gets rid of manual contract management tasks and reduces the risk of non-compliance, breach of contract, and financial loss.
It also allows all contracting partners to monitor each other’s performance against contractual obligations, resulting in a stronger and healthier partnership.
How does blockchain change contract management?
Generally speaking, the conditional “if/when… then…” commands in a blockchain contract are performed by a distributed system of computers upon the successful verification of agreed-upon conditions.
To establish terms, parties must decide on the rules that govern the various transactions, investigate all possible exceptions, negotiate mutually beneficial terms, and define a course of action for resolving disputes.
Since you cannot change, lose, or delete the data stored in a blockchain, it provides an ideal environment for generating immutable contracts.
Let’s take a look at a few benefits of blockchain contract management.
1. Smart Contracts
The blockchain is the foundation for smart contracts—legally binding computer codes. However, to ensure 100% transparency, developers responsible for coding multi-party agreements must consider the rights and interests of everyone involved.
When all parties have agreed to the contract’s provisions, it goes into effect immediately. Then, it is enforced, delivered, paid for, and performed through network automation.
In short, smart contracts can be used to automate routine CLM tasks. For instance, if one party lends money to another, the smart contract can be written to record the loan principal, interest rate, and any other terms and conditions.
Furthermore, conditions and responses can be programmed into the smart contract itself.
Hence, when everyone completes the agreed upon conditions of an agreement, a smart contract executes itself automatically, bypassing the need for human intervention. Smart contract management is unlike traditional contract managing methods, where the absence of either party might derail the entire business relationship.
A typical blockchain contract can initiate a variety of self-executing processes, such as:
- Approval requests
- Electronic signatures
- Payment disbursement
- Interest calculations
- Penalties for breach of contract
- Data storage and backup
- Delivery of products or services
2. No Mediation Required
With blockchain contract management tools, relaying information between contracting parties is far simpler than ever. It does not matter if the issue is connected to transactions or another clause in the contract.
Blockchain contracts are written in code and hence, set in stone. As all parties may now readily communicate with one another on a blockchain, there is no need for an intermediary to mediate and resolve partnership disputes.
Also, there is no cap on the number of users allowed to exchange information. This eliminates numerous periods of inactivity common in a normal contracting process. Traditionally, a contract may become stale if one of the parties is unavailable.
On the other hand, blockchain contract management ensures faster deal velocity and fewer opportunities for manipulations, thus, safeguarding contracts against unnecessary stalling and avoidable delays.
3. Accurate Audit Trail
Contracts stored in a blockchain do not have verification or contract manipulation problems. When contracts are signed on the blockchain, all parties can quickly and easily verify their authenticity, making it more seamless and reliable.
In a blockchain, the data is wrapped in several layers of security with end-to-end encryption. Thus, blockchain contract management guarantees that the information stored therein does not change or fall into the wrong hands.
In doing so, a blockchain-driven CMS protects your privacy and ensures that all the data is verifiable and accurate. Also, it’s impossible to change anything on a blockchain. So, you can rest assured that the stored information is always reliable. But this does not mean you can never revise the terms of a blockchain contract.
If you have the necessary authorization, you can easily modify an agreement according to your needs.
4. Time and Cost-Effective
Whether you’re dealing with a routine scalable agreement or a complex contract with competing priorities, you’ll find smart contracts inherently efficient.
By using blockchain technology on your CMS, you can reduce the time, money, and effort spent on manual contract workflows by removing extra parties or processes.
Blockchain makes this possible by keeping a record of all previous transactions. It allows compliance of old tasks with the new ones, speeding up the workflow. A transaction will be processed only when all the prerequisites have been met.
The only requirement, however, is to craft the terms and conditions as precisely as possible.
The smart contract will take care of itself if the appropriate parameters are set. So, you won’t need an extra set of eyes to verify whether or not the rules are being followed. The amount of time and cost savings that result from such a high degree of automation is too much to ignore.
In addition, this frees up developers to focus on enhancing, modifying, and modernizing the software to meet the ever-changing business requirements. However, all the stakeholders need to sit down and agree upon the terms and conditions to reach this level of automation.
Conclusion
Smart contracts built on the blockchain make managing contracts automated, secure, and transparent. What are your thoughts? Leave your comments below.
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