How to Use Smart Contracts For Revenue Sharing, Explained
What is revenue sharing and how its business model works?
It’s pretty much like sharing your salary with your family at the end of the month.
Revenue sharing is a distribution of profit (and losses) amidst the stakeholders, business alliances or even the employees of an organization.
Although it was popularized in recent years on the internet as part of affiliate marketing and advertising programs, revenue sharing has been around for long. It is employed in just about every industry including government, technology, media, sports, energy, investments, entertainment, hospitality, etc.
With the concept of sharing economy tipped to be our future, revenue sharing is getting more exposure.
How one can actually apply it?
Options are immense.
In government, for instance, one of the applications of revenue sharing is seen in tax income sharing among different units of government. For example, states or provinces sharing tax revenue with local governments or federal governments.
In entertainment, one of the applications of revenue sharing is seen in how music services, such as Spotify for instance, share the revenue they generate from their music streaming services with artists.
In sports, leagues governing bodies and the teams in the league share revenue generated from local and national television rights.
In investing, revenue sharing is employed to reward investors in the form of dividends or profit sharing.
Are there any challenges in this business model?
Transparency, security and speed.
It is difficult to list the current challenges of the revenue sharing business model, as each industry has its own, mainly because the underlying businesses are different in setup. For instance, music-streaming services that bundle songs into one offering encounter the issue of how to allocate the revenue to each song in the bundle. In sports, creative accounting can be used create an imbalance in revenue sharing due to too many parties involved in the validation process.
However, looking through all the complaints regarding revenue sharing across industries, it's easy to generalize the challenges they face under these themes: transparency, speed and security (i.e., assurance of payment).
How can smart contracts help?
Smart contracts assure accurate revenue sharing in real-time.
As a quick reminder, a smart contract is an agreement, powered by Blockchain technology, put out in the form of a computer program and executed once all pre-determined and programmed terms and conditions are satisfied. At its core, the smart contract protocol aims to make contracts more secure, disintermediated, executed in real time and more transparent, which are the exact challenges with the revenue sharing business model.
And what about transparency in revenue sharing?
Yep, this too.
Think about an investment opportunity where you invest, say, 10 BTC valued at about $140,000 for a 10 percent ownership in the venture. This opportunity also gives you the right to 10 percent of the revenue or $0.10 on the dollar. Before now, you invest your money and hope/trust that the business will honor the terms of the contract.
However, with a smart contract, you can be sure that you will get your correct share of the revenue. All that is needed is to insert these terms into a smart contract. As soon as the revenue flows in, the smart contract will be executed, immediately transferring 10 percent of the revenue to your wallet. Xwin, a Blockchain-powered sports betting startup, is one of the companies aiming to use smart contract to improve revenue sharing transparency.
Can smart contracts make revenue sharing secure?
Since smart contracts are based on Blockchain technology, which is a public ledger that is maintained by multiple parties simultaneously, smart contracts cannot be altered. Therefore, as long as a smart contract is initiated, no single party can decide to alter it. A smart contract can only be discontinued or altered if all parties agree. Interestingly, this level of security is achieved without the need for an intermediary, which has its own cost.
And speed of execution, any improvements there?
Well, we’ve mentioned the real-time process.
But that's not all. One other speed advantage is that with smart contract, you could have quicker access to yield's from your investment, possibly on weekly or even monthly basis, as long as the smart contract contains such clause. It is costly for this level flexibility to exist with traditional revenue sharing model because it would require non-core administrative activities too often.
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