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Smart Contracts Implementation, Applications, Benefits, and Limitations

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DOI: 10.7176/JIEA/9-5-07

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Journal of Information Engineering and Applications www.iiste.org
ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

Smart Contracts Implementation, Applications, Benefits, and

Limitations
Silas Nzuva
School of Computing and Information Technology, Jomo Kenyatta University of Agriculture and Technology,
Nairobi, Kenya

Abstract
The world today has realized the vast technological evolution that has greatly shaped the production and
management functions of business enterprises. Traditional contracts can take weeks or even months to initiate,
and there have been numerous instances of breaches and lack of trust for contracts in both the private and public
sector. A smart contract can be defined as a self-executing contract that utilizes blockchain technology to
digitally enforce, verify, or facilitate the performance or negotiation of a contract. Owing to the security and
decentralized system exhibited by blockchain technology, smart contracts can foster transaction credibility
between contracting parties without the necessity of third parties as exhibited in traditional contracts. Any
business organization that aims at achieving greater heights in management and production dimensions must
consider utilizing robust technologies that are aimed at bolstering its competitive edge. Owing to the newness of
smart contracts, characterized by very few studies on the same, this research reviews how smart contracts
through blockchain technology can be implemented in an organization to enhance performance and outlines the
applications, benefits, and limitations associated with such contracts.
Keywords: Blockchain technology; smart contracts; smart contract applications; smart contract benefits; smart
contract implementation; cryptography; cryptocurrency
DOI: 10.7176/JIEA/9-5-07
Publication date:September 30th 2019

1. Introduction
The emergence of advanced technologies has led to increased competition between business as each tries to
utilize the latter to bolster the employees' productivity and the general performance of the firm [7]. As a result,
technology has become a critical backbone of organizational operations and a core driver of organizations’
innovations and competitiveness. According to Iansiti et al., business enterprises have shifted from the traditional
ways of business and have consequently adopted modern, more reliable and cost-efficient mechanism; smart
contracts are some of these mechanisms [20].
Any financial transaction that is carried out by an organization with third parties can be viewed as a form of
a contract, however simple, or complex the transaction is. Essentially, financial openness and transparency are
some of the core aspects of successful organization management as they create an environment that is conducive
not only for investment but also for the establishment of trust with different organization stakeholders [7]. The
blockchain technology is a common buzzword today, perhaps due to the unique technology that it is based on. A
blockchain is a chain of transaction records, usually referred to as blocks, that grows autonomously, and all the
records are linked together to form a chain, and secured through cryptographic techniques. [36] A block may
contain one or more records, and each block holds the hash function of the preceding block, the transaction data,
and timestamp [36]. Once the block is completed and committed, it is chronologically added to the blockchain
and cannot be modified.
These characteristics of the blockchain technology make it highly useful as it is secure, reliable, and the
ability to monitor the digital transaction is warranted [24]. The blockchain technology has vastly been used in
cryptocurrencies such as Bitcoin and Etherium. Cryptocurrency can be viewed as a virtual or digital currency
that entails the use of cryptography to promote the security of the financial transaction. As such, a
cryptocurrency can be used as a secure medium of exchange as it utilizes high cryptography to ensure
verifiability of asset transfer, control of unit creation and evades regulations that may otherwise be imposed by
bodies such as government institutions [20].
A smart contract can be defined as a self-executing contract that utilizes blockchain technology to digitally
enforce, verify, or facilitate the performance or negotiation of a contract [8]. Owing to the security and
decentralized system exhibited by blockchain technology, smart contracts can foster transaction credibility
between contracting parties without the necessity of third parties as exhibited in normal contracts.
Organization performance is greatly determined by the strategies employed by the management in
streamlining organizational processes, operations, and bolstering the employees’ productivity. Being a new
technology, smart contracts through blockchain technologies bear the ability to positively or negatively impact
the performance of a firm; hence, such a study is critical. Any business organization that aims at achieving
greater heights in management and production dimensions must consider utilizing robust technologies that are

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

aimed at bolstering its competitive edge. Owing to the newness of smart contracts, characterized by very few
studies on the same, this research at out setting the benefits of smart contracts and how they can successfully be
implemented organizational setting.

2. Blockchain Technology Use in Smart Contracts

2.1. Past Studies
The technological revolution has seen the emergence of new systems and technologies that are more efficient
and reliable [36]. Likewise, smart contract technology is made to replace the traditional forms of contracts to
promote transactional safety, efficiency, and reduce possible contract beaches. Kosba et al. argues that the smart
contracts systems, which are based on blockchain technology have emerged as a result of the efficiency,
reliability, and security that has been noted in the decentralized cryptocurrencies such as, Litecoin, Etherium, and
Bitcoins among others, which the authors pinpoint that they may be the future of online financial transactions.
Essentially, smart contracts are built on a new blockchain that is characterized by distributed consensus,
assuming the existence of no conflicting computation resources [24].
Luu et al. examined the security of transactions in smart contracts by investigating the smart agreements
that run on the Etherium blockchain technology [26]. According to the authors, the Etherium smart contract
system has presently seen increased adoption and holds virtual coins tuning to millions of dollars [26]. It is worth
noting that the majority of the smart contract systems today are often run in synchrony with the respective
cryptocurrencies; as at present, Bitcoin and Etherium have established smart contracts systems that run under
their underlying blockchain technology. To examine the security of the smart contracts, the researchers
introduced various bugs that were made to manipulate the Etherium smart contacts blockchain for financial
benefits [26]. Apparently, it was unveiled that though the system is significantly secure, there exist various gaps
with respect to the distributed semantics of the blockchain technology under which the system runs. The authors
denoted the need for the enhancement of the Etherium operational semantics to tighten the security of the system
[26]. The researchers further unveiled the existence of the DAO bug, which makes blockchains vulnerable to
DAO exploits; Etherium cryptocurrency lost more than $60 million in 2016 as a result of this vulnerability [26].
The security of smart contacts has as well been discussed by Peters and Panayi, who insist that precautions must
be taken in rolling out the smart contract system to ensure that the system is not prone to vulnerabilities that
otherwise mess up the digital assets [31].
On a different point of view, Peters and Panayi suggest that the emergence of blockchain technology may
disrupt the banking industry in the new future by facilitating digital assets, automated banking ledgers, smart
contracts and global money remittance [31]. This implies that it is high time for business organizations and
financial institutions to start considering cryptocurrencies as a mode of payment, and smart contacts and a
possible replacement of the traditional business contracts [38]. Business organizations that do not adjust to the
prevailing technologies are more often than not caught unaware, and the technology becomes disruptive to their
business processes and operations. Nevertheless, in the banking context, Peters, and Panayi explain that the
blockchain-based technologies must be extremely smart to evade vulnerabilities that otherwise can be used by
malicious attackers to propagate fraud or swindle the blockchain participants their virtual money [31]. Attacks
on blockchain systems may be hard to detect and control, and hence sufficient security measures must be put in
place before rolling them in the banking context
Omohundro takes a machine learning perspective with respect to smart contracts. The authors argue that the
blockchain technology, smart contacts, and cryptocurrencies have resulted in new opportunities for the
application of machine learning and artificial intelligence [AI] in general [30]. Zhang et al. argue that the smart
contacts can be made smarter, by enhancing their ability to interpreted real-world knowledge and make more
reasonable, logical, and sound decisions in online commerce [38]. By integrating AI into smart contracts and
cryptocurrencies, it is possible to ensure that the blockchain follows specific safety and measures to promote the
safety and reliability of the transactions [2].
A study by Christidis and Devetsikiotis on the internet of things and the emergence of smart contracts
showed that a combination of internet of things and blockchain technology, which is the core framework of
smart contracts, is an efficient and powerful technique that can trigger wide-scale transformation on how
financial transactions are carried out or how a firm interacts with its business partners across different industries
[8]. As such, the authors argue that smart contracts, internet of things, and the blockchain technology use can
pave the way for new distributed applications and novel business models and processes [8]. This is because the
blockchain technology allows the establishment of a distributed peer to peer network that allows for verifiable
interaction between the participants without the necessity of a trusted partner. Christidis and Devetsikiotis further
denote that the blockchain technologies upon which the smart contracts are built, allow for cryptographic
automation of workflows and processes that are time-consuming [8].
There exists a wide array of smart contracts, depending on the type and purpose of the contract. However,
though smart contracts are programmed to self-execute, some usually depends on the information that they gain

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

from the external sources, such as financial instruments transactions [13]. As such, having authentic data feeds
into the system is very critical in enhancing the security, performance, and authenticity of the transactions.
Zhang et al. developed and rolled out a Town Tier [TC] system that is made to categorically act as a bridge
between the blockchain and the information sources [mostly websites] to authenticate the information that is fed
to the system. The main purpose of TC is to promote confidentiality, reliability, and integrity of smart contracts
[18]. Essentially, though smart contracts seem to have a bright future across all the industries, their security
threshold seems questionable because a mentioned, some contacts rely on data that is external from the
blockchain and the reliability, and trustworthiness of such data cannot always be guaranteed, owing to the fact
that the chain holds millions of transactions [39].

2.2. How Blockchains Work

Essentially, a blockchain can be perceived as a data structure that is shared and replicated across machines on the
network. According to Böhme et al., this technology was first introduced by Bitcoin, one of the leading
cryptocurrencies across the globe [4]. Hillbom and Tillström explain that the introduction of the blockchain
technology has aided business organization in transitioning from the traditional forms of contracts and the
adopting smarter and more robust contracts that do not require the intervention by any party [18]. The use of the
blockchain technology in cryptocurrencies and smart contracts aids in keeping a powerful decentralized ledger
transaction that defines who owns what in the network. [8].
It is, however, critical to understanding that blockchain is a technology by itself and hence does not require
cryptocurrencies for it to function. The blockchain technology can be adopted in a wide array of operations and
transactions that can be carried out in a decentralized manner. A blockchain can be perceived as batched and
timestamped blocks of records whereby each of the blocks contains the hash reference of the previous block.
Such an aspect results in a chain of blocks. The machines in the network and which have access to the formed
chains of blocks can decipher the message and interpret the state and message being sent across the network
[17].
Ona different point of view, it is also critical to examine how the blockchain network operates to gain a
comprehensive understanding of smart contracts implementation through blockchain technology. A blockchain
network can be perceived a group of nodes/computers/ machines that have access to a given chain of blocks, and
which can perform operations on the blocks, based on the information that each of the machines or node holds.
For instance, a given node in the blockchain network can act as the main entrance of various users of the
blockchain into the network; it is also worth noting that the users are as well able to transact on the network
through their specific nodes. The end result of the blockchain is a sophisticated peer to peer network that is quite
secure.
Kocarev et al. explain that in interacting with the blockchains, the users usually use a set of public and
private keys [22]. Analytically, the public and private keys are cryptographic approaches that are used to warrant
safe transactions through encapsulation of the data being transmitted. As such, unless a user has the key, they are
unable to decipher the message being transmitted. The use of the private keys by the users in the blockchain
network is made for the purpose of signing their own transactions; the public key, on the other hand, is used to
address the users. As denoted by Kocarev et al., the use of the asymmetric cryptography through the public and
private keys promotes non-repudiation, integrity, and authentication [22]. The users broadcast the signed
transactions to the one-hop peers in the network.
 The one-hop peers in the network are typically neighboring peers. These nodes are credited with the
responsibility of first validating the transactions before broadcasting them further to other peers in the
network. If the transaction is deemed invalid, then it is discarded. This process continues until the
transaction is spread throughout the entire blockchain network. It is essential to note that the validation
process by every one-hop node in the network makes it literary impossible for invalid transactions to
be broadcasted. This then reaffirms the issues of security and authenticity of the transactions.
 The validated transactions by the nodes in the network within a given time are then collected, batched,
and timestamped as a candidate block. The process of collection, validation, and timestamping is
usually referred to as mining. The node that performs this function then re-broadcasts the block again,
back to the chain network for further action. It is, however, important to note that a consensus is often
reached in selecting the mining node as well as the constituents of the block.
 The network nodes are again tasked with the responsibility of re-verifying the authenticity of the re-
broadcasted block, by checking whether all the transactions held by the block are valid and whether the
reference values for the previous block are accurate. The block is discarded if either of the set
conditions is violated. Else, it is added to the chain of blocks, and the information it contains is updated
on each of the nodes, to ensure commonality of the information broadcasted as well as an up-to-date
view of the block status. It is, however, vital to note that this process occurs for every transaction to
ensure security is maintained.

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

The success of an organization is greatly depended on a wide array of factors. Fairfield explains that the
ability of the organizational leaders to adopt reliable, yet secure and efficient technologies is very critical [14]. In
line with this, Delmolino et al. explain that today, the competitiveness of an organization is a multifaceted
construct that must be addressed through the implementation of various strategies [11]. Technology has become
a critical measure of organizational effectiveness, efficiency, and performance; any organization that does not
match with the emerging trends, therefore risks being phased out by the competitor firms. On the same note,
Fairfield explains that an organization should focus on technologies whose implementation will aid in
smoothening organizational processes, will enhance the organizational relations with partner organizations and
will eliminate inefficiencies that result from a lapse in operations management and process automation [14].
As earlier defined, a smart contract is simply a self-executing script, based on the set conditions. As such, the
dimensions and applications of the smart contract in organizational settings are many. Typically, smart contracts
can be implemented in various areas, ranging from contracts with the suppliers to contracts with the retailers,
resellers, and the end customers. The fact that the latter is self-executing brings in the issues of integrity and
openness. In an organizational setting, the technology bears the ability to positively improve the financial
openness of a firm, by promoting safety, security, accuracy, and integrity of the organizational financial
transactions

2.3. Validity in Smart Contracts Execution

On a different point of view, it is important to look at what entails validity of transaction in smart contracts. To
better understand the issue of validity, it is vital to think of the blockchain network as a group of non-trusting
computers or machines, that perform read or write on a common database. Therefore, since the machines are
non-trusting, they must ensure close monitoring of one another for any transaction that is being made to the
general ledger [the database] for safety purpose. To prevent possible conflicts between these machines, a set of
conditions or rules must be set. To begin with, the bock chain network must ensure that the distributed
environment is protected. This is achieved by helping the different users in the network to reach a common
consensus on the status of the transactions. This is attained by ensuring that every transaction must conform to
specific rules before being committed to the shared database.
The rules and conditions for the execution of the transactions are embedded in each of the blockchain
network clients. Therefore, each client machine in the network understands what is expected of the transaction
that they are executing and the peer nodes also do understand what to expect from transactions of other machines
in the network. Therefore, whenever a client performs a transaction since the transactions are replicated across
all the machines in the blockchain network, every client checks whether the transaction conforms to the pre-
programmed rules, before being relayed further across the network [18].
To better understand this concept of the validity of reactions and which forms the core of smart contracts
and associated security measures, it is prudent first to understand how also the shared database works in
blockchain technology. A database usually made of tables. Each table contains a set of rows. Essentially, a row
can be perceived as a single record, and the transaction is any action that seeks to create or manipulate one or
more of the records. However, in the blockchain environment that is characterized by a shared database model,
each of the records/rows can be mapped to a specific private and public keys. The private key is usually held by
the owner of the record/transaction, while the public keys are held by other machines in the network. The public
keys aids in controlling the editing of each of the record, as before the transaction is committed, all the machines
in the network must be in consensus.
The following of the defined rules by each of the nodes in the network results in authenticated and
timestamped blockchain that defines the network activity of the nodes [4]. Owing to the defined rules in each of
the nodes, the users do not have to trust each other as their activity is already predefined by the set conditions.
This gives rise to the concept of trustless environment, whereby trust emerges as an inherent property of the pre-
set conditions embedded on the nodes with respect to the specific blocks within the network as well as the
resultant interaction of the nodes [14].

3. Implementation of Smart Contracts

3.1. Digital Asset Transfer
Smart contracts can be as well adapted in digital assets transfer. This is highly applicable to the organization's
dealings with customers and suppliers, especially where there is an exchange of money. Smart contracts can be
used to transform the traditional asset transfer to digital transfer. For instance, in an organization that deals with
customer credit cards, such as banks, the amount spends and account balances in the credit cards, the
organization would have an aggregate database dedicated for the task. Such a database would have a typical
table that would have attributes such as "amount," "owner," and “asset type” among others [14]. In the database,
the table may have entries such as “Sam," “20”. On a different note, another record maybe “Tim," "0".
Interpretation of the first record would indicate that Sam has a credit balance of $20, while Tim has a credit

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

balance of “$0. A transaction may be initiated by Sam to transfer the specified amount to Tim. Suppose Sam
transfers $10 to Tim, Sam’s account is debited $10, while Tim's account is credited with $10. After the
transaction is committed, Sam would have $10, while Tim becomes $10. This is an example of digital asset
transfer since cash is considered to be an asset that can be expressed in digital form. Logically, though the end-
users receive the updated account balance instantly, what happens is the manipulation of the stored records in the
database.
Multinational organizations usually interact with thousands of customers on a daily basis. While some
customers are physically served, others are served by automated systems, such as online carts that are synced
with check out systems. Essentially, the sale or purchase of a commodity by an organization results in a specific
form of contract, which may or may not be enforceable under certain circumstances. Cong explains that a
business organization owes the customers and general stakeholders a duty of care, and therefore must ensure that
activities are carried out with reasonable care to ensure that both the interests of the customers and those of other
stakeholders are protected [18].
Each sale or purchase by the organization can, therefore, be treated as a contract. In the case of a business
organization, the purchase of any service package by the customer or the purchase of the products by the
organization can , as a contract. Such contracts can be digitalized and executed as digital tokenized assets.
Pettersson and Edström explain that a digital tokenized asset is the expression of any given form of asset in an
electronic manner, making it possible to transfer one or more units of the assets to a different party [32]. Digital
transfer of assets between the organization and its partners can be simplified just as in the example of Sam and
Tim bank transfers and be expressed easily through blockchain technology, that warrants cryptographic
verifiability, validity, and security through the use of the decentralized transactional model.
In implementing smart contracts through blockchain technology, a business organization can approach the
latter through a trustless environment approach. This would require the implementation of a shared database,
whereby each row of the respective table in the database would represent the details of a specific entity, who
may be a supplier or a customer. However, rather than having the "owner' in the case of the banking example
given, the attribute would contain the public key of the node /user allowed to change the record.

3.2. A Scenario for Purchasing a Service Package

A shared database would exist between the company and all other parties in the blockchain network, typically all
the customers. Suppose Customer Y has five units of X [X may represent credit card balance], the respective
record in the database would contain Customer Y’s Public key in the “owner” column of the respective table, as
well as values 5 and X in the quantity and asset type respectively. Assuming Customer Y knows the public key
of Company B, then he/she should be able to transfer a certain unit of the digital asset to Company B. In this
case, Customer Y would need to initiate a signed transaction using her private key that would reduce the specific
asset type by the specified units in the amount. Using the public key of B, Customer Y is then able to credit
Company B’s amount column with the specific units of the assets reduced.
However, unlike in the relational and object-oriented database systems whereby the manipulation is done
directly to the records, the blockchain technology entails the use of transaction blocks, whereby the transactions
are linked to another. Therefore, after customer Y purchases new package and transfers the digital asset [money]
to Company B, a new record/ row is created with the updated information and a timestamp, while the old row/
record is deleted. According to Greenspan, in smart contracts through the use of blockchain technology, rows are
not modified; rather, old records are deleted, and new records with updated information created [17]. The asset
balance of both the Company B and the Customer Y can then be calculated through the aggregation of the
database record that corresponds to their respective public keys and whose asset type matches the digital asset
that as transferred.

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

Table 1. Setting up smart contracts with partners by organizations.

Phase Description

Agreement This step entails the identification of cooperative opportunities and specific
Identification outcomes by multiple parties. The parties may entail Company B and its
business partners
The scope of the agreement is defined; it may include but not limited to
transfers, the right of use, asset swaps, and business processes, among others.
Setting conditions The conditions act as the guiding principles for the contract execution. The
smart contract is triggered by the party to the contracts or anything else defined
in the contractual terms that act as a trigger event. Triggers may be a specific
date, GPS location, a natural disaster occurrence, and specific financial market
indices. Again, temporary conditions such as religious events, birthdays, and
holidays can as well be used to trigger smart contracts. For instance, in the case
of Company B, a promotion of smart contract to Customer X can be initiated if
the customers' birthday is near, with the contract purporting to offer a more
exclusive deal
Business Logic As already explained, smart contracts through blockchain technology are
scripted pieces of code that have been developed to and organized in a manner
that triggers execution upon the happening of the trigger event or activity. In
this step, a code is written with the pre-set conditions; more often than not, the
conditional statement such as if, then, else is used to ensure logical and
automated execution of activities
Blockchain technology Encryption is a critical part of the blockchain technology. Encryption using
and Encryption cryptographic techniques is done to warrant the security of the transactions and
also ensure that verification and authentication of the communication and
messages being sent across the network. The program development and
encryption, however, must conform to the underlying blockchain model that the
smart parties' intent to use. For instance, if the parties plan to use the Etherium
blockchain architecture, then the code must be written in Etherium based
blockchain programming language
Execution and This entails the commitment of the initial contract transaction and subsequent
processing transaction. Upon verification of the set conditions by each of the participating
nodes in the blockchain network, the nodes reach a consensus on the validity,
verification, and authenticity; the new smart contract is then written to the
current block. Afterward, the code is executed, and outcomes are updated on
each of the nodes in the network. These new written instructions act as the base
for verification and controlling transaction processing to ensure validity.
Updating the Network After the execution of the contract. Each of the nodes is updated on the new
state. Essentially, once a transaction or a new record and subsequently executed,
no alteration can be done; the only thing that can be done is appending and
creating a new record. This is one of the disadvantages mentioned earlier on.

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

3.3. A Base Model for Adoption of Smart Contracts by Business Organizations

Figure 1: A model for the implementation of smart contracts

3.3.1. Phase Trust Decentralization
This phase entails establishing whether is possible to decentralize the trust of the contract in question. As earlier
explained, the blockchain technology operates in a decentralized manner, an also in an environment of non-
trusting partners. As such, trust decentralization is one of the critical aspects that must be ensured before
implementing smart contracts. This phase would entail asking questions such as whether the contract has a
trusted authority, if yes then a determination is done on whether the trust can be decentralized. Decentralization
in this context implies having multiple non-trusting partners checking on the execution of the contract. If the
trusted authority cannot be decentralized, then the traditional approach to the contract would be more preferred
than the smart contracts. If the contract can be decentralized, the organization and the parties have to decide on
how to decentralize the authority. Owing to the virtual nature of the smart contracts, this step would lead to a
process of storage and computation, entailing off-chain, and on-chain computing.
3.3.2. Blockchain Configurations
This step would entail consideration and decision making regarding the configurations of the blockchain. To
begin with, the parties to the contract first decide whether a bock chain is needed to solve the contract. The
criticality of this process is that while some contracts would benefit from the implementation of a smart contract
through blockchain technology, others would not. Hence, it is critical to determine whether the contract in
question requires blockchain. Afterward, a decision ought also to be made on whether the contract requires only
one blockchain or multiple blocks chains. This is because while some contracts are simple and require only one
blockchain, others are quite complex and may require multiple blockchains. This is especially true in contracts
that involve multiple parties and which are also interlinked with other contracts, resulting in a system of
dependencies.
On a different point of view, there exist various forms of the blockchain. For instance, each of the
cryptocurrencies such as the Bitcoin, Etherium, Lite coin, etc. have their underlying blockchain technology. It is,
therefore, critical to first establish the type of blockchain technology that is more suitable and how it can be
implemented in the contract. Afterward, it is critical to consider the data structures to be used. Essentially, smart
contracts are basically coded segments. The code segments are based on specific data structures, which govern
their execution. The suitability of specific data structures may depend on the contract in question. For instance, a
linked list may be preferable in certain occasions that tagged union or an array. Again, a record may also be
preferable in certain occasions s compared to a class or a linked list. Therefore, with the help of the developers,
the parties to the contract must also establish the kind of data structure to be adopted.

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

Again, the blockchain configurations also encompass the consensus protocol to be employed. Consensus
means how the nodes in the blockchain network come to an agreement regarding the global view of the
blockchain status. These are the defined rules and conditions that govern when and how to execute transactions
is to make changes in the shared database to avoid conflicts. As such, there is the need to establish rules to
govern concurrent control and ensure execution of valid transactions
On a different point of view, it was earlier mentioned that a blockchain is simply a chain of blocks that has
a set of records/transactions that have been verified, validated and timestamped together, with each block
containing the reference of the preceding block, to ensure continuity of the chain. In this step, there is the need
to determine how large the block size would be; this is realistically establishing how many transactions amount
to a single block. This configuration is critical in controlling the block creation and ensuring uniformity in
transaction processing.
3.3.1. Phase Trust Decentralization
After the blockchain configurations for the smart contract have been done, there is also the need to consider
other business decisions. Koulu argues that the operations of an enterprise are influenced by a wide array of
factors, some of which may be direct, while others may be indirect [25]. As such, it is the responsibility of the
managers and top organization leaders to establish the indirect factors that affect the organizational operations
and ensure that they are properly addressed. Seijas et al. bring in the concept of business logic; in otherwise,
each of the smart contracts has to be within the legal and operational framework of the organizations and must
positively contribute towards the achievement of the corporate goals and objectives [33].
Some of the core considerations that organizations have to make are the incentives that the customers and
business partners may need to collaborate in the smart contracts. Essentially, the adoption of various
technologies such as smart contracts by the firm does not imply that the business partners and customers will
willingly and voluntarily support. Sergey and Hobor explain that in many circumstances, an organization has to
push its business partners and customers in order to adapt and collaborate in using the new technology [34].
Pushing in the context does not literally mean dictating the customers and business partners to adopt the
technology but rather, using various ways to convince the relevant parties to adopt the technology. This may
entail showing the benefits of adopting the technology to the customers as well as using various incentives to
lure the customers into agreeing to use the new technology. In the case of organization implementation of the
smart contacts, before rolling out the technology, it would need to make a consideration of the incentives that
may be useful in drawing the partners. For instance, the company can consider lowering the rates for the service
packages of the customers who agree to smart contracts.
It was earlier on mentioned that the blockchain network is characterized by the anonymity aspect.
Anonymity in this sense implies that the respective identities of the users in the network are anonymous, and the
transaction on the ledger are treated as eliminating from an anonymous entity. The aspect of anonymity is often
propagated by the existence of no-trusting parties’ interaction in a decentralized environment. Depending on the
nature of the contract anonymity may be necessary while in others, the anonymity aspect may not. The essence
of a smart contract is to digitize traditional contracts. Hence, though necessary, anonymity is extra.
The final phase of the model is deciding when, where, and how to deploy. However, this step is dependent
on the overarching blockchain architecture selected and used in developing the code. For instance, if the code
was developed using the Etherium architecture, it cannot be implemented on the Bitcoin blockchain architecture.
This is because the blockchain architecture for different companies differs. As such, how and where to deploy
the smart contract would be depending on the underlying blockchain infrastructure chosen. On a different point
of view, a specific node can as well be chosen as the entry point of the contract, where all participants access the
general ledger containing the set of transactions for the smart contracts.

3.4. A Scenario for Purchasing a Service Package

The current state of organizations is characterized by traditional contract, which is characterized by low-level
automation and physical exchange of assets. For instance, the businesses have a trade/sales agreement, while
suppliers have the suppliers’ contract with respective firms. All these contracts are documented both physically
and electronically. Further, there is an intermediary, which is often a government entity credited with the
responsibility of ensuring effective execution of the contracts. The main aim of the intermediary is to ensure the
creation of legally enforceable contracts and also ensure that breach of the contract by either of the parties is
mitigated.
On the other and, the expected states entail the use of smart contracts to automate everything and ensure
that intermediaries are eliminated. For instance, there will be the existence of a smart contract between
consumers and the organization, suppliers, and order organization, contractors, and the organization, etc.
Essentially, after the implementation of the smart contracts, business organizations will be operating in the smart
world whereby all the contracts will be programmed to self-execute, suing multiple blockchain networks. This
will enhance the efficiency of the company as well as financial transparency and customers support. The result is

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
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a well-functioning organization, which is highly efficient. Further, the implementation will also result in reduced
costs, which otherwise increase the profit margins

3.5. Benefits and Applications of Smart Contracts

3.5.1 Accuracy
One of the advantages that business organizations would benefit from the implementation of smart contracts is
accuracy. As explained in the processes of setting up a smart contract, all the information regarding the contract
is expressed in a conditional format, using the if-then statements. For instance, when ordering a specific service
package if customer x pays x units of y, then immediately credit the recipient of the amount and also open the
service package for customer x. Since the majority of the contracts entail the exchange of cash. Then the smart
contracts can be synced with cryptocurrencies such as Etherium, Lite Coin or bitcoin, among others, an aspect
that would further enhance the robustness, accuracy, and performance of the entire system. The expression of all
terms and conditions in a smart contract must be explicitly and accurate. Essentially, this is a critical requirement
because transaction errors may emanate from any omission. Therefore, the automation exhibit in the smart
contracts avoid the majority of the issues that are found in the traditional contracts
3.5.2. Clear Communication and Transparency
Virtually, the terms and conditions of the contract terms and conditions become explicitly visible to the different
network players of the specific blockchain. Therefore, once the contract is established, changes cannot be easily
implemented. Each of the transaction by either party to the contract is monitored and controlled by other network
nodes in the blockchain. As a result, transparency is promoted, and issues of fraud are eliminated. In the modern
era, various cases have been reported whereby the organizational is accused of defrauding the customers and not
offering them the value of their money.
As aforementioned earlier, each sale of good or service by an organization results in a contract that may or
may not be legally enforceable. However, in various cases, one or more parties to the contract may breach the
contract terms and conditions. In the case of sales, an organization may overcharge the customer or may shorten
the service package timespan agreed, without notifying the customer. The implementation of the smart contracts
puts every detail of the contract into the light. Unlike in the traditional contract where the organization would
have to use the legal framework as the intermediary, in the virtual world all that is needed is other nodes in the
network, who are tasked with the responsibility of ensuring that each of the transaction pertaining to the contract
is accurate and valid
3.5.3. Speed and Efficiency
Essentially, smart contracts do not rely on human intervention, and their implementation is guided and overseen
by other nodes in the blockchain network. Therefore, once the contract is triggered, the scripted contract self-
executes. This is often achieved through the use of trigger events when scripting the contact. For instance, a
trigger event may be a date, time, or even an activity initiated by a party to the contract, such as the transfer of
certain units of cryptocurrency from the customer’s wallet to that of the company. Once a trigger event happens,
the contract now starts executing itself. For instance, for online subscription-based organizations, once a specific
unit of the cryptocurrency is received, then the subscription for the customer is auto-renewed.
Unlike in the traditional contracts that are less efficient and which require some form of human verification,
here, the verification of whether the correct amount has been paid, and whether the correct subsection, service,
and associated aspects have been given to the number is determined by the nodes in the blockchain network. As
such, there is no longer reliance on the organization's developed system to determine the contracts with the
customers. The organization also has no sovereign authority over the transactions as well as over the contractual
agreement with the partners. Each contract is targeted as a separate entity, and each transaction, irrespective of
its origin is first validated. Overly, this results in a fast, resilient and robust way of contract execution
3.5.4. Security
A study by Marino and Juels finds the smart contracts to have one of the highest security measures. Smart
contracts implemented through block chin technology entail the use decentralized network made of non-trusting
parties [40]. The fact that the parties in the network are non- trusting makes them keep check of one another to
ensure each transaction is carried out effectively, and that there is a uniform worldview of the status of all the
transactions. Again, blockchain technology is implemented through cryptography techniques. This technology
entails high encryption of data and the use of both private and public keys for reading the transactions in each
blockchain, as well as executing any transaction. The fact that before any node commits a transaction, the
transaction must first be validated by all the odes across the blockchain network enhances the security of the
smart technology.
A study carried out by Seijas explains that data encryption and specifically, the use of cryptography
techniques can greatly enhance the security of communication and data exchange [33]. As such, any contract that
is implemented in an encrypted manner enhances the security of the transaction and thwarts any malicious
activities that may be propagated to alter the execution sequence or execute invalid transactions.

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3.5.5. Cost Reduction

Essentially, top business managers are credited with the responsibility of coming up with strategies and ways of
reducing costs in an organization. The main aim of setting up a business enterprise is to make profits; therefore,
all the activities in an organization must be construed in a manner that promotes the achievement of corporate
objectives, as well as maximizing the wealth of the shareholders [41]. In the recent wold that has seen a vast
technological revolution, the success of the business enterprises is vested in their ability to keep tabs with the
prevailing technologies and adopt ensures and techniques that otherwise increase the employees' productivity
and performance.
The implementation of smart contracts through blockchain technology cuts the need for a middleman, such
as the legal personnel. This, in turn, aids in reducing the overall organizational costs and maximizing the profit
margins by an organization. In the case of multinational corporations that deal with a huge number of contracts
on a daily or weekly basis, the implementation of smart contacts with its business partners and customers can
greatly aid in reducing the various costs incurred in the traditional forms of contracts. The contracts can further
bolster the efficiency of the organization, which is a critical ingredient for organizational success and increased
performance. It is, however, critical to note that despite the security, cost reduction and efficiency aspects
associated with the smart contracts, the latter is not by any chance magical, and hence may be subject to flaws.
For instance, the quality and execution of the contract highly depend on the input, which is basically the coded
version of the contract. Therefore, if there are flaws in setting up the smart contracts, such flaws may trigger
adverse effects as well as poor quality of the output generated.

3.6. Limitations of Smart Contracts

Despite the various advantages noted and which emanate from the implementation of smart contracts, it is also
crucial to note that smart contracts are associated with various limitations, the disadvantages of the smart
contacts limit their application in various real-life scenarios. As attested by Kolvart et al., more often than not,
technology often outpaces the law and the regulatory framework. This has been a noticeable trend with respect to
smart contracts [23].
3.6.1. Immutability
Essentially, since smart contracts are scripted as a piece of codes, once set up, the contacts cannot be modified
easily. In the traditional contracts, amendment of terms and conditions is often used, especially in long-term
contracts whose execution is depending on real-life dynamics, and the conditions keep changing. Owing to the
rigidity exhibited in the smart contracts after being established, the latter results in a wide array of practical
problems more so with respect to the ease of modifying the contract terms in depending on various situations.
This is underpinned by Huckle et al., who explains that the conventional contracts have provisions that
allow for the annulment, embedment, and modification of contracts [19]. The implementation of smart contracts.
To a greater extent, makes it literally impossible to achieve analogous goals. Nevertheless, various actions can be
taken in order to include aspects of modification and contract annulment. For instance, an escape hatch can be
included in the coded contract. The escape hatch can be used to allow for the modification of the contract terms,
in order to cater for the real-life contracts which are characterized by vast dynamics. Nevertheless, implementing
such in the smart agreements may compromise the security apparatus, and hence may require further tightening
of the transaction controls in order to ensure that the escape hatch is not used to initiate invalid transaction or
transactions that are aimed at unauthorised manipulation of records This is as well noted by Kolvart et al., who
explains that owing to the complexity of the smart contract and blockchain technology in general , ensuring that
the right permission is granted to the right node, and that all the nodes can monitor the amendment of the
contract may be quite tricky but necessary[23].
3.6.2. Contractual Secrecy
Mostly, the blockchain technology entails the sharing of smart contract across all the nodes in the blockchain
network, since all the transaction is recorded on general ledger using encoded permissions in each of the nodes.
Essentially, the blockchain technology entails the use of anonymity, whereby all the participants in a blockchain
network are anonymous and secured. However, there is no security of the contract execution. This is because
though the nodes are anonymous in their operations, the ledger is maintained public, and hence, the transactions
are visible, and there is no security of such. Buterin explains that this is an area that needs to be focused because
despite the nodes being anonymous, the maintenance of a public ledger in the distributed environment results in
a privacy lapse [6].
While the essence of the smart contracts is to maintain a public ledger that is visible to all parties in the
network and to monitor the validity and accuracy of the taxations, there is the need also to develop a protocol,
which can aid in the verification of the transactions without necessarily reading the contents of the transaction.
This is because though the participants and the origin of the transaction may be anonymous, the contents are not;
and actually, each node can read and access the transaction contents. It is as well critical to developing measures
to curb this privacy issues since security is not all about anonymity and encryption, it also entails ensuring the

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ISSN 2224-5782 (print) ISSN 2225-0506 (online) DOI: 10.7176/JIEA
Vol.9, No.5, 2019

content of the transaction is protected against access by other parties. As such, this aspect of smart contracts is
yet to be fully addressed.
3.6.3. Legal Adjudications and Enforceability
Traditionally, the establishment of a valid contract covers various constructs, which make it legally enforceable.
Kim and Laskowski explain that the key characteristics of a legally enforceable contract are; offer by one party
or parties, acceptance by the other party or parties, a promise, consideration, and legal capacity mutuality and in
some contracts, a written instrument [21]. While these elements of a contract are very critical, some of them are
not applicable to smart contracts.
For instance, the financial sector exhibits immense regulations by the government, and specific permissions
and licensures are required for a form to engage in transactions execute don general ledgers. However, despite
the licensure and associated approvals, the legal enforceability of the smart contracts is yet to be established and
synced with the contract law as well as other laws that give financial transactions. All elements of aspect
contracts are expressed as segments of code, and the aforementioned elements of a valid contract may not
necessarily be identifiable. This, therefore, necessitates the need for the translation of the legal framework
governing the contracts into the software logic to ensure that besides the smart contract being self-executing,
they also adhere to the legal regulations of formal contracts. Further, such tantalization should take in to account
the blockchain developer's point of view, the lower's point of view and the transacting parties' points of view.
Such an aspect would aid in enforcing the legality and validity of the contracts. However, as at present, the
organizations that have implemented the smart contracts through blockchain technology have to continuously
struggle with the aspect of the contract validity and enforceability. Nevertheless, Vukolić denotes that the upside
of the smart contracts is that breaches of contracts are rare to occur, as the execution of the contract is dependent
on the pre-defined conditions which are also triggered by an event that neither of the nodes in the network has
control over [35].

5. Conclusions
Business organizations can use smart contracts for various transactions, such as suppliers and consumers. Under
this approach, the contract would be written as a conditional (if then) program segment that would then be
implemented on the blockchain [30]. Owing to the newness of smart contracts, there exists little to no existing
studies on the impact of this technology on organizational performance.
The world today has realized the vast technological evolution that has greatly shaped the production and
management functions of business enterprises. Traditional contracts can take weeks or even months to initiate,
and there have been numerous instances of breaches and lack of trust for contracts at both private and public
sector. Through the age of digitalization, there lies an opportunity to connect the businesses in a more trusted
manner as well as increasing efficiency by automating contracts for a reduction in risk management in business
operations. The traditional approach to contracts entails the use of a third party as well as regulators for the
contract to be legally enforceable. In smart contracts, there need not be third parties since once the contract is
committed, it self-executes, based on the pre-set “if-then” contract conditions [8]. The blockchain technology
upon which smart contracts are built using a distributed model of the transaction processing and a public ledger,
it becomes merely impossible for the committed transaction to be changed, as every node in the blockchain
network receives an automatic copy of the blockchain after every new block is added. Owing to this, there is a
need to examine how smart contracts affect the organization' performance
The blockchain technology has literally attracted the attention of various individuals and organizations
across all the sectors, such as in real estate, utilities, healthcare, and even the public sector. This has partially
been caused by the technological revolution that has seen the emergence of better and more sophisticated
technologies, characterized by cognitive computing, the internet of things, and cyber-physical system. A study
conducted by Fulbright on the emergence and trends in industry 4.0 indicates that technological advancement is
likely to see a sharp increase over the next couple of years, characterized by the manufacturing of more smart
devices [16].
The increasing interest in the blockchain technology and smart contracts is driven by the ability to execute
various business operations and tasks; tasks that were previously undertaken via a trusted intermediary [14]. The
researcher continues to argue that through smart contracts executed via blockchain technology, it becomes
possible to warrant the security of transactions.
Blockchain makes it possible for a business organization to execute tasks with partner organizations
through trusted networks irrespective of whether they have an established trust relationship with such partners or
not. The absence of intermediary, which was a core characteristic of the traditional contract enhances efficient
and rapid reconciliation between the parties engaged in a given contract. Morrison explains that the reliance of
the blockchain technologies integral and smart contracts in specific on cryptography promotes the aspect of
authoritativeness in all the transactions in the network [28].
In explaining how the smart contracts work, Seijas explains that a smart contract is simply a self-executing

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Vol.9, No.5, 2019

script that is contained in a given block within the blockchain [33]. The scripts allow for efficient distribution
and the automation of workflows. Such an aspect has made blockchain technology and smart contracts in
specific an interesting subject to researchers on the internet of things and cryptography. On a different point of
view. Buterin asserts that the move to adopt a decentralized approach in computing and specifically with respect
to the smart contracts may or may not make sense to the layman [6]. However, Cohn explains that smart
contracts built on the blockchain technology bring about a wide array of advantages and disadvantages [9].
Blockchain technology allows the expression of the traditional contracts to a self-performing/ self-executing
virtual contract, based on some pre-set conditions and rules. As at present, the smart contracts cannot be said to
be legally binding, as the legal framework component is yet to be added to the smart contracts architecture. A
critical aspect to note, however, is that though the smart contracts may not be legally enforceable, or else, the
parties may not be legally liable for the breach of contract, they may as well be used to enforce performance of
parties in legal contracts. The execution of a smart contract; therefore, followers the pre-programmed
instructions and once the transactions have been verified and committed, they cannot be modified or undone.
As observed in the analysis and discussion section, business organizations would benefit from two main
advantages that are associated with the smart contracts implemented through blockchain technology. First, issues
of debate by parties to the contract with regard to the meaning and interpretation of the contract would be limited
since the interoperation of the set condition in the program segment is done by machines and hence not subject to
fallible human interpretation. Further, the transaction costs are also reduced, and since the performance is
executed by the computer programs and the need for the intermediary is eliminated. It is, however, critical to
note that the flaws and deficiencies in smart contracts may have vast ramification not only the organization but
also to the customers and the business partners.
The implementation of the outset smart contract model would ensure that business organizations are able to
execute millions of contractual clauses without the necessity of human intervention. Nevertheless, it should be
the responsibility of the organization to ensure the development of smart legal contracts. A smart legal contract
is a concept that describes ensuring that all elements of the legal contract are adhered to implement the contract,
though they may not be enforceable in such interacts. The main aim of enlisting the traditional legal framework
governing contacts is to ensure that the contract produces desired results. To achieve this, a business
organization would ensure that the possible elements of legal contracts, such as an offer, a consideration, and a
promise are included in the scripted contract. Further observation of various regulations should so be made, such
as the laws governing the consumption and sales of goods.

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