What makes a contract “smart”?
Smartphones already exist, smart homes are being built. But how smart are the millennial seeds of economic life? Let’s look at smart contracts!
What is a contract?
Economic life is unimaginable without arrangements. These legal statements express the mutual and consensual will of the parties, which gives rise to an obligation to perform the service and a right to demand performance. Contracts have evolved over a long process into the form we know today. The parties have a wide margin of discretion in determining the content and, due to the dispositive nature of civil law, may even deviate from the law, where such deviation is not prohibited.
Upon hearing the word contract, everyone associates it with a carefully crafted document signed by the parties. This does not mean that there are only written agreements. A legal statement may be made orally or even by implied conduct. For example, if I verbally agree with a close acquaintance of mine that I will lend him some money, the contract will be concluded and will be valid. However, if a dispute arises between the parties, the lawsuit is likely to be won by the defendant as he/she is in a more favorable position and it is difficult to prove the conclusion of the contract without a written document.
Because economic life is in many cases unpredictable, actors want to contract with people they trust. Thus, there is a greater chance of avoiding future conflicts.
Isn’t this coercion of trust an obstacle to economic life?
A person trusts his family members best first and then his friends the most. Business players, on the other hand, often do not know each other. Many times, they need to take the time to get to know each other before closing a deal, which is a longer process, especially on the B2B side. Also, even sympathy can decide on a future business relationship in as little as 5 seconds. A relatively young technology, the blockchain offers a solution to these difficulties.
What is a smart contract?
A smart contract is a computer program running on a blockchain that serves to automatically execute an agreement between the parties under predefined conditions.
The term was first used by computer scientist and lawyer Nick Szabo in the early 1990s. In his words, the smart contract is “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”
A smart contract does not require a third party for enforcement. Depending on the conditions, it automatically executes itself at the specified time or when an event occurs. Thanks to blockchain technology, it is not possible to change the conditions that have already been defined.
In short, the realization of my will does not depend on trust or some intermediary actor. In any case, the contract is implemented by technology.
How does It work?
Behind the first decentralized cryptocurrency, Bitcoin there is the so-called distributed ledger technology, or usually BlockChain technology. A blockchain is a distributed database that registers a data list of so-called blocks. The blockchain is constantly expanding with new blocks. And thanks to the peer-to-peer network, cheating the system is impossible.
The information entered in each block must be validated by all nodes on the network. When this happens, a new block is added to the chain. This block can no longer be modified afterward, so the system cannot be cheated, nor bribed, nor peculated. No one may subsequently enter into our contract or dispute the terms. If someone did try and demand the performance of the contract on the grounds that the condition was met, the other members of the peer-to-peer network would perceive the abuse and the contract would not be executed. Fraud with a smart contract is virtually impossible.
The Bitcoin blockchain was only capable of executing transactions (in fact, this is also a smart contract, but we don’t traditionally use the term for these transactions). Subsequent altcoins are already capable of more. Ethereum is the second-largest cryptocurrency in terms of market capitalization. Ethereum blocks are capable of storing codes.
The Ethereum blockchain is primarily used to create smart contracts. Based on this, the system will run the smart contract code if a message is sent to it with enough transaction fees.
Can any contract be “smart”?
The answer is currently NO. Applications built on Ethereum (dapps) can serve three purposes:
- Create new kinds of money and digital assets
- Web apps that are unstoppable and uncensorable
- Build decentralized organizations, property, or virtual worlds that are governed collectively
For example, an insurance smart contract might look like this:
The parties shall determine the conditions. If an event such as a property burns out, the event triggers the automatic execution of the smart contract, making payment. Since this is an external event, we need to use so-called “oracles” to do this, which convey up-to-date information about the outside world.
Smart contracts are also suitable for making payments. French fintech startup b-cube.ai specializes in the automatic trading of cryptocurrencies. The bots of b-cube.ai are designed to make more profit for the customer. Advanced forecasting models and artificial intelligence produce signals designed to outperform market returns in the long run. The signals are performed automatically by an automatic bot. The customer must pay 20% of the profit generated to the company. As the trading bot trades on the customer’s own account, the payment of the profit-sharing fee is not automatic. This payment, in turn, can be made fully automated by smart contracts, making the payment process easier and smoother.
When it comes to BlockChain technology, we often hear the trait that the middlemen are left out of the process. For this reason, many are also envisioning the end of the brokerage professions with the spread of the blockchain. The world is constantly changing, new technological innovations are being born. However, we can also see these as tools to make our lives easier. The emergence of these technologies does not bring about the disappearance of these professions, but their transformation.
Trading cryptocurrencies involves risk. The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the article’s content as such. Author, website or the company associated with them does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.