Bitcoin has paved the way for the blockchain to go mainstream, and it’s now one of the most famous ticker symbols across the globe. And with its magnanimous success comes a fleeting complication.
How do we make changes after we put something inside a blockchain?
Smart Contracts, that’s how! DUH!!
Smart contracts introduce the ability to legally modify things inside blockchains in a secure and trusted manner. And it’s exclusive to Ethereum, sort of!
But what exactly is it, and what sets it apart from a typical Bitcoin proof-of-work? Let’s find out!
What is a Smart Contract?
A Smart Contract is like a regular contract but in digital form. It can be thought of as a program that’s stored inside of a blockchain.
It verifies, facilitates, and helps to negotiate on behalf of one or more parties. Because the contract is “smart,” its actions are pre-programmed, without the need for middlemen.
Ok, grab a beer and gather round the campfire folks.
Let's say you and your friends decide to start a GoFundMe for one of your friends whose house recently burned down. Yes, that's oddly specific.
You put up $10,000 each but agree to distribute the funds only when the donations have reached a minimum amount of $500,000. The smart contract becomes an escrow and proceeds to collect and hold all funds it receives from various donations. When the amount has been met, it sends the total amount to your friend’s wallet.
Simple, right? What we’re really talking about here is programmable money.
Now let's say your friend is also a crazy gambling addict, and after receiving a large sum of money, they might be tempted to YOLO that half-million dollars into Bitcoin or poker. Yikes!
Well, you could put additional measures in place to ensure there are no more casualties.
You could divide up how the funds will be distributed and to whom. You could also have a slow-release clause where a portion of the funds becomes available after certain conditions have been met. Like appliances cannot be purchased until the house has been built.
Since there is no need for a third party to oversee the transactions or middleman, it makes the smart contract smart. It works inside a secure and decentralized system of rules.
Suppose your digital GoFundMe did not gather enough funds. What happens to all that dough?
It’s simple, really! The smart contract will automatically return your funds into your wallet, safe and sound minus fees for using the network.
What’s good about these contracts is that the rules are set at the beginning of the contract’s creation and cannot be changed in the future. The agreement or deal would always be locked in place.
But how does it actually work?
How Does the Smart Contract Work?
Great things inside the blockchain sometimes come in the most complicated packages.
Smart contracts are digital pieces of code that live on the Ethereum blockchain. It might be helpful to think of Ethereum as a smartphone. And just like our smartphones, we have the ability to install and run apps.
When Ethereum developers create apps called decentralized apps or dApps, they incorporate smart contracts to make their apps smarter.
Are you feeling smarter yet? Well, you should. This is the future you and your children will eventually become accustomed to.
So why do we put it onto the blockchain? Great question!
Smart contracts get the added benefit of blockchain’s most iconic functionalities. Well, at least two of them:
- Immutable – It cannot be changed being deployed into the real world
- Distributed – It requires everyone on the network to validate every change inside the system
This all sounds fine and dandy, but what’s the catch?
The Pros and Cons of Smart Contracts
At the time of editing, Blockchains are still a fairly new concept to most people, and with any innovation, we must also account for unintended consequences and risks.
As we move towards a more decentralized way of interacting with our world and finances, we’re placing the power of choice back into the hands of the individual.
Exercise caution when interacting with smart contracts.
Strengths of the Smart Contract
Transparency – it can be audited by anyone. This is a key component of any trustless transaction. And seeing is believing. And although you may need someone with the knowledge and expertise to do so.
Safe & Secure – they inherit their security and protection from the blockchain. It takes a considerable amount of time, resources and knowledge to successfully attack a blockchain. That’s because the information is stored and verified by every participant across the entire network.
Adaptability – There are many use cases, including voting, transferring of ownership, insurance, real estate, and protecting intellectual property.
Weaknesses of the Smart Contract
Lack of legality – While you can practically do almost anything using a smart contract, legally, some things may be outside the legal limits of the law.
Costs for creation – Nerds! We need these wonderful creatures with a valiant love for programming to develop our contracts. And they aren’t cheap. Though you could learn to program your own smart contract, it might be time-consuming and error-prone. We often refer to this sage advice:
It’s human-made – As exciting as the technological innovation being discussed here is, we should always be vigilant. Hacks, exit scams, rug pulls, and nefarious intentions can be masked with presumably good intentions. We’ve put together a list of the most common crypto scams here for you.
A future filled with Smart Contract Technologies
What good is newfound technology if we can’t use them to make our daily lives better?
Like Caesar eating grapes from the finest and most technologically advanced garden of Eden — here are some industries that will elevate along with your standard of living.
Good use of smart contract technology would be supply chains, where a distributor can track where raw materials are and verify their authenticity.
By making fewer errors, minimizing lost shipments, minimizing disruptive delays, and authenticating raw materials, we get to enjoy a higher quality product.
The awesome folks at OriginTrail have been making some great progress in this area.
Insurance payments and policies are based on risks. But as some have discovered, even when you do everything by the book, you may still experience difficulties from your provider.
Your contract would serve as an agreement that needs to be met from time to time for its policies to continue to protect you. This is standard for all policyholders.
Now suppose you need access to immediate funds from your policy for your business, your home, or family. The smart contract can easily verify in a transparent way that all conditions have been met.
This allow for faster and easier processing. Say goodbye to red tape!
With the help of blockchain and smart contract technologies, companies can easily track who held their stock, reveal insider trading, and empower their investors by providing a seamless way for voting and delegation. One of the many benefits of a decentralized ledger.
Additional benefits include real-time access to price and lowering transaction costs by reducing middlemen. It’s a win-win for everybody.
Rights can be distributed and hold policies and protocols for the artists’ royalties. A reduction in middle-men would mean easier access and less processing needed for artists to benefit from their work.
Artists would be free to take bigger risks, innovate, and be rewarded for their contributions to our society and culture rather than toeing the line of a corporate machine.
Real-world Applications of Smart Contract in Various Industries
Considering smart contracts offer many benefits, various industries are increasingly embracing them to help streamline their operations. These range from airlines and real estate agencies to government arms.
Airline Insurnace Goes Crypto
In 2017, French airline AXA announced that it had decided to dip its toes into the blockchain sector through Fizzy, a blockchain-based parametric insurance product. Through Fizzy, AXA sought to automatically compensate clients for delayed flights for more than two hours.
This is how it works – when a client decides to buy flight delay insurance, it records the purchase on the Ethereum blockchain, making the insurance immutable.
When a policyholder’s flight is delayed for more than two hours, the smart contract connected to global air traffic databases automatically triggers compensation. In so doing, AXA entrusted the compensation decision to an external network, improving customer trust.
The program has been discontinued but the real world use cases still apply.
Banking Goes Crypto
Cashaa, a next-generation banking platform, joined hands with Populous World, a smart contract-based invoice platform, in 2018. This partnership saw Cashaa offer Populous World’s clients access to its blockchain-based digital smart wallet. The two firms combined their blockchain capabilities to help improve invoice financing, hence alleviating challenges for businesses across the globe.
Buyers would purchase invoices through the platform’s PPT token and use the Cashaa wallet to spend their profits in more than 210 countries. Through this collaboration, Cashaa also got a unique opportunity to increase the number of its wallet users by onboarding Populous World’s clients.
Real Estate Rentals Go Crypto
The Real Estate Institute of Queensland (REIQ) announced in 2019 that it sought to roll out “tenancy agreements” that are executable as digital smart contracts. The firm joined hands with Igloo to develop the tenancy agreement product. REIQ’s General Manager, Josh Callaghan, noted that creating this product would offer numerous perks to all parties involved in an agreement. These include more transparency and seamless property management.
Detailing how the product would work, the smart contracts would help create simple and secure transactions for every tenancy agreement by eliminating manual procedures. The agreements would then use the blockchain as an immutable source of truth.
Stopping Child Labor in Congo
The Global Automobile company collaborated with Hashcash Consultants to develop a blockchain-powered supply chain network. Reportedly, this partnership sought to track the supply chains of several minerals that are key to the manufacturing of batteries, including lithium, cobalt, and tungsten. The blockchain network would allegedly leverage smart contracts to trace and authenticate these minerals abundant in the Democratic Republic of Congo.
Despite being rich in minerals, the country has for a long time made headlines for allegedly employing child labor in the artisanal mining of the minerals. This partnership aims to put an end to these practices by streamlining the entire process from mining the minerals to the battery manufacturing plants.
US-based Banks Goes Crypto
The most recent partnership that depicts the real-world application of smart contracts came from Hashcash Consultants and an unnamed US-based bank. This partnership saw Hashcash get into an agreement to help the bank finance corporate trade through a scalable blockchain-powered platform for business-to-business (B2B) payments. The platform would help mitigate operational costs and simplify the development of IT infrastructure.
The blockchain platform would leverage smart contracts to offer instant reconciliation, real-time document sharing, and automation. This would help make B2B payments faster and more effective. Apart from this, the solution would allegedly unite involved parties and digitize the bank’s end-to-end trade processes, minimizing processing time. Per Hashcash’s CEO, Raj Chowdhury, this collaboration would help the unnamed bank manage working capital easily through automated account balance tracking.
A Little Way Down the Road…
People, especially the corporate big guns, would benefit a lot from contracts like these. The economy would move much faster and more fluid. And the people who get stuck doing a one-dimensional robotic job can move into doing something that can bring out their full capacity as human beings.
The need for a brand to build trust easily goes out of the window with the existence of smart contracts, as the technology can protect every party involved in a given protocol, policy, or agreement. Smart contracts eradicate many middlemen, processing time, and human error as it is implicated in a given system for a company or brand.
Not only is work made efficient, but transactions for both the buyer and seller are made more safe and secure. Since policies and protocols are already pre-set, disputes would easily be settled, and problems can be solved much faster.
As it is also a ledger, a client’s preferences, transaction history, and conversations can easily be pulled out as needed, overall making up for a better workspace and a better economy.
Thanks for attending our TED talk.