Smart Contract Business Drivers: Time Value Of Money (Blockchain Report Excerpt)

By October 21, 2018Bitcoin Business
Click here to view original web page at cleantechnica.com

Along with our regular daily clean tech news coverage, CleanTechnica also produces in-depth reports on various aspects of clean energy and clean transport. One of the emerging technologies we cover that isn’t directly a clean tech innovation is blockchain, which promises to be a catalyst for innovation in the green economy in the very near future. Blockchain is probably most widely known to the public as “having something to do with cryptocurrency and Bitcoin, right?,” which is partially correct, but the technology itself has a wide range of applications, some of which will be crucial in the fields of distributed renewable energy, grid management and energy storage, and smart contracts, among others.

The full report Blockchain – An Innovation Enabler for Clean Technology, which was published in July, is a deep dive into blockchain and its potential, and we will be posting more excerpts from the report over the coming weeks. (Read the last installment here.)

There are 9 factors which will help to identify the sweet spot for smart contracts:

1. Herstatt risk due to currency volatility
2. Time value of money
3. Speed of transactions
4. Cost of transactions
5. Accounts receivable and default costs
6. Penalty clauses
7. Multiplying parties
8. Trusted contract writers
9. Bad contracts

This article is the latest in a series which digs into each of these 9 factors.

Time Value Of Money

Time value of money is another issue with smart contracts. Escrow is fine and dandy, but it’s not used on all that many contracts compared to net 30 terms. Some of this is due to the fees being high, which smart contracts reduce substantially. But time value of money is another big reason. Every major business has a chief financial officer whose job includes maximizing the returns from cash on hand. They move it into and out of foreign currencies and money market funds to gain some benefit from it.

Net 30 terms means that in a one-month contract, you only have to pay 60 days after contracting, with 30 days for delivery of the service and 30 days to payment. In pretty much every longer-term contract of multiple months, sellers negotiate to create terms where they can invoice monthly to increase the time value of money to them while buyers try to negotiate longer durations between invoicing to maximize their time value of money.

But in smart contracts you have to put the money into escrow at time of signing the contract, 60 days earlier. And as the Herstatt risk hedge assessment indicates, you will likely have to put more value into escrow than the actual value, double the money in the example.

In the hypothetical case above, this means you have no potential to get value out of your money for two months. Once again, this favors the seller, not the buyer. And this also assumes that you have sufficient cash-on-hand that not having the amount in escrow isn’t putting anything else at risk.

Stay tuned for more excerpts from Blockchain – An Innovation Enabler for Clean Technology, or view the summary and request the full report at https://products.cleantechnica.com/reports/

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