What Everyone Is Getting Wrong About Blockchain and Smart Contracts
Whenever a new technology appears on the scene — or is applied to a new industry or problem — the public reaction is pretty predictable:
If the technology proves beneficial, it satisfies the initial curiosity, wins over the skeptics, lives up to the excitement, and is eventually adopted. But, it’s not always a smooth ride. There are a lot of truly innovative technologies that have never managed to overcome the public’s skepticism. And, there are even more that get drowned in (probably premature) excitement and hype.
In the construction industry right now, the potential application of blockchain and smart contracts is at that stage.
Why all the hype about blockchain and smart contracts in construction?
As we’ve discussed previously at the Constructible blog, the application of blockchain and smart contracts to construction processes has real potential, especially in concert with BIM and the vast amount of data it makes available.
To summarize, here’s what smart contracts running on a blockchain could do for construction, in theory:
Automate most if not all of the transactions and decisions involved in optimizing the supply chain.
Speed up the payment of invoices surrounding every step in the constructible workflow.
Cut costs by eliminating “middlemen” such as lawyers and brokers, allowing companies to deal directly with customers and suppliers.
Enhance the security and validity of transactions.
And, there’s probably a lot more that could potentially be accomplished as you dig deeper into each phase of the workflow, but just those four bullets could translate into thousands or even millions of dollars saved annually for large construction companies.
That’s why there’s so much excitement around the idea of applying blockchain and smart contracts to construction problems.
Myths and hype surrounding blockchain and smart contracts in construction
The trouble we’re running into now, though, is separating valid excitement from unsubstantiated hype and flat-out false statements that inevitably start to circulate around every exciting new technology that shows real promise. So, let’s break down a few of the most pervasive myths and misunderstandings around blockchain and smart contracts in construction.
The technology is ready today
This is, perhaps, the biggest and most dangerous misconception for construction companies today, especially those that don’t have a large R&D budget that needs spending. Even if you wanted to, there are very few commercially-viable solutions on the market that can employ blockchain and smart contracts to enhance your construction workflow, and most of those that do exist are still in the prototyping and beta testing stages.
Why the hype?
While blockchain technology has been in use for many years now, and some form of smart contracts has been a part of blockchain nearly as long, it’s still a relatively new technology in many ways. And, while there are all sorts of theoretical ways it can be used in many industries, there are actually very few real-world applications that have been built, deployed, and tested to the point they can be considered reliable.
The most famous, of course, are cryptocurrencies like BitCoin and Ether. While there have been hiccups along the way, the exchange of — and even investment in — these currencies has grown in popularity, and it’s proven to add real-world value in certain circumstances. As most people know, cryptocurrencies run on blockchain. And, smart contracts — coded instructions housed on individual “nodes” of the blockchain — are used to facilitate the creation and exchange of cryptocurrency.
Some startups, such as T-Mining and SkuChain, are developing and testing blockchain-based solutions around the supply chain and logistics, but their solutions are still brand new and largely untested. It’s likely going to be at least a few years before anyone can say for a sure what their impact will be.
Smart contracts can replace paper contracts
If you’re expecting digital smart contracts to eliminate your need for a ream of paperwork on every job, or that you can remove your legal team’s monthly retainer from your operating budget, you’ll need to rethink.
Why the hype?
One of the key benefits that blockchain could theoretically bring to construction is the streamlining of much of the legal and regulatory delays and expenses that are currently a “necessary evil.” Everything from subcontractor SOW’s to restocking supply inventory could potentially be optimized if it were encoded in a smart contract and allowed to run automatically.
And, the concept of “trustless” transactions — meaning all verification and handling of assets is done digitally via the smart contract — is a large part of the appeal of blockchain in general. It offers the possibility of fast and seamless movement of funds or other assets without the inhibiting factor of needing to rely on another human being anywhere in the process.
The trouble is, truly “trustless” transactions simply don’t exist. Even in highly refined blockchain applications like cryptocurrency, there has to be an inherent trust in the platform itself, the code that’s handling the transactions, and, by extension, the programmers or companies responsible for creating and maintaining that code. If anything breaks — which it has before, and will again — then everything running on the blockchain is jeopardized. After all, it’s just a computer program, and when has there ever been a computer program with zero bugs?
Realistically, any construction company deserves to lose if they entrust their legal and financial future to a smart contract without backing it up thoroughly with a paper contract and every other tried-and-true means of protection.
Everything on blockchain is secure and safe
Again, it’s just a computer program. If a human can program a smart contract, another human can theoretically alter it, take unfair advantage of it, or even delete it. The only way to eliminate those possibilities is to employ all the real-world verification processes and legal red tape that use of blockchain technology is supposed to be eliminating.
Why the hype?
Giving credit where it’s due, the architecture of blockchain ledgers do make them very difficult to alter. And, if a change occurs, there’s going to be an indisputable record of it. There’s also a significant verification mechanism built into nearly every blockchain application that includes digital signatures and, in many cases, some confirmation of an asset’s provenance. So, for those reasons, blockchain is fairly secure from the kind of hacks and data breaches we’re used to hearing about, and it holds up to many of the claims being made.
That said, all those qualities of blockchain — its trustworthiness, tamper-resistance, immutability, and more — depend completely on the quality of the input being provided. The principle of GIGO (Garbage In, Garbage Out) has been preached since computers were first invented, and it still applies when discussing blockchain: if an asset’s provenance is unknown or inaccurate, it doesn’t become known and accurate because it’s been included in a smart contract. If a smart contract is written poorly, it can fail to function as intended.
So, what’s the bottom line about blockchain and construction?
These are just a few of the common myths and misunderstandings surrounding how blockchain and smart contracts are poised to revolutionize construction. The fact is, this technology holds tremendous promise for our industry. And, it’s going to be exciting to watch it develop and see if it can eventually live up to all the hype and more.
But, right now, it’s important for the average construction company to keep boots on the ground and heads out of the clouds.