Using Metcalfe’s Law to Avoid Murphy’s Law
Beyond the regular costs attributed to manual workflows, extended payment delays, disputes, complicated reconciliation processes and informational friction, the pandemic has magnified challenges exponentially, manifesting in supply chain disruptions and circumstances greatly exacerbating counterparty contention. Commercial transaction costs are soaring, resulting in global enterprises wasting billions of dollars — though, this doesn’t have to be the case.
Aphorisms aside, it’s imperative that businesses figure out repeatable, scalable ways to reduce inefficiencies and eliminate variables that incur excess transaction costs — during turbulent times or the regularly scheduled program. How, then, can businesses conduct business better?
Companies that embrace technology to address the multiple issues involved in the execution of contracts can drive down the costs of doing business by eradicating margins of error and removing friction. In other words, the antithesis of operating in an environment governed by Murphy’s Law is one that, instead, looks to the expansive and exponential properties of Metcalfe’s Law.
Power in numbers
Contracts, particularly those in the industrial sector, are often hundreds of pages long and loaded with byzantine language, opaque business logic, and metrics that result in distrust between counterparties. The majority of counterparty disagreements center around terms and fulfillment.
Smart contracts offer an opportunity to revise the unavoidable business process of commercial transactions. Additionally, smart contracting in a network environment enhances the benefits by invoking the principle central to Metcalfe’s Law to provide greater value to network participants. Metcalfe’s Law posits that “the value of a network is proportional to the square of the number of users.” Essentially, value exists due to the “connectivity between users, enabling them to work together and achieve more than they could alone.”
Companies that utilize a smart contracting network rather than a point solution become an ecosystem of customers, suppliers, data providers, and validators. As smart contracts are implemented across participants using a standard data model, a de facto set of standard contract clauses and code and organically make each company a potential data source and contract counterparty for the entire network can be created.
As large industrial companies adopt smart contracts and the network approach, they add their suppliers and customers to the network, increasing the data and participants available to the entire network. Since the network enforces common data models and contract standards, apples-to-apples comparisons become more widely available and credible with every smart contract executed on the network.
Tactical steps forward
In the real world, organizations can begin with a single contract and a willing partner, ideally with whom invoice processing has been a challenge. For this example, both counterparties have agreed upon a reliable and trustworthy data source.
Data should first be brought into a blockchain platform, where it can be mapped to a data model referenced by the smart contract and then stored. The smart contract uses the stored data to confirm that the contract conditions have been met and applies the appropriate modifiers and pricing to create charges and then accumulates the charges for invoicing. Blockchain records all transactions and supporting data in immutable blocks and identically distributes them to the contractual parties. From there, the preparation, submission, approval, and payment of the invoice can become frictionless.
When the first contract is automated, businesses naturally begin to evaluate other smart contract use cases and can extrapolate the benefits from one relationship throughout their entire supply chain. As large organizations use the Gross Transaction Value (GTV) of their contracts on a network, the value flows through the network and its multiple layers of counterparties and subcontractors, allowing for the opportunity for each participant to reap the financial benefits of smart contracts.
Metcalfe’s Law: Application of a theory
Consider the precedent set by Walmart when it revolutionized inventory management by forcing its top 100 suppliers to adopt RFID tags to encode smart labels on product palettes digitally. Initially, the move was met with resistance, but the traceability benefits quickly overcame the objections.
As large companies figure out the savings and security inherent in smart contracting, particularly in a complex landscape amid much supply chain disruption, it’s only a matter of time before players of all sizes get on board to capture the value and efficacy available when Metcalfe’s Law cancels out Murphy’s Law.
This article, authored by Andrew Bruce, originally appeared at VentureBeat.