The Blockchain is a system decentralized that allows all parties to participate. The blockchain has many benefits, including the fact that you don’t have to pay middlemen and save time. The blockchain has its problems. They are, however, rated as faster, cheaper and more secure. Banks and government agencies are increasingly turning to these systems. By giving computer control of contracts, we can improve the efficiency and equity of business.
Imagine being able to make updating your will easier, reduce your mortgage rates, and ensure your friend could never weasel his way out of a wager? Smart contracts promise all of this and more. Smart contracts have become more and more real thanks to the cryptocurrency.
Computer programs can execute the contract terms automatically. They may one day replace banks and lawyers to handle certain financial transactions.
As always, there are many questions about this new technology. Will people use it? How will all of this work with the current legal system, and how?
What is smart contracting?
Smart contracts date back to the year 1994. Nick Szabo, a cryptograph widely credited for laying the foundation for bitcoin, realized in 1994 that smart contracts could be created using the decentralized ledger. Smart contracts are also known as self-executing agreements, blockchain contracts or digital contracts. This format allows contracts to be transformed into computer code and stored on the system. The network of computers running the blockchain would then supervise the contract and provide feedback, such as the receipt or transfer of money.
Szabo’s initial theories on how contracts would work were never realized. This is because there wasn’t a digitally native system of finance that supported programmable transactions. If a bank has to authorize money transfers and releases manually, the whole purpose of smart contracts is lost. Phil Rapoport is Ripple’s director of trading and markets. He says that “computer programs cannot trigger payments at this time.”
Bitcoin’s advent and increasing adoption is changing this. Szabo’s original idea is being revived and smart contracts are now built over bitcoin and other digital currencies.
Smart contracts allow you to exchange shares, money, real estate, and anything else of value, in an open, transparent way. Smart contracts are the best way to avoid middlemen.
The best way to explain the technology is to compare it to a vending device. If you needed a document, you’d go to the notary, or an attorney, pay, then wait for it. Smart contracts are different. You simply put a Bitcoin into the vending machines (also known as smart contracts). The ledger will then deposit your license, money for escrow or anything else into your account. Smart contracts are able to define rules and penalties for an agreement the same as a conventional contract. The technology automatically enforces these obligations.
Two major open-source projects are working on smart contracts at the moment: Codeius and Ethereum.
Ripple Labs developed Codius. Ripple Labs also developed its own digital coin called Ripple. Codius, although managed by a private company, aims to interoperate with cryptocurrencies such as Ripple or bitcoin.
Ethereum was originally created by Vitalik, a 20-year old programmer. This is a new digital currency that has smart contracts built into the payment system. It would replace “coins” such as bitcoin but it appears to be a more community-driven project.
Smart contracts can be made possible by cryptocurrencies such as Bitcoin, but there may also be a reciprocal effect. Some lawyers believe that smart contracts could be used to illustrate the unique benefits of virtual currencies.
An Example of a Smart Contract
Imagine I’m renting you an apartment. You can do this by using cryptocurrency to pay and receive a receipt. This receipt will be held by our virtual contract, and you’ll receive the digital key at a specific date. If the key is not delivered on time, the blockchain will release a refund. The function will hold the payment and the key if I deliver the key prior to the rental date. This is a widely accepted premise. It’s also witnessed by a large number of people. So, you can be sure that the delivery will be flawless. If I hand you the key, I am sure that I will be paid. The key is yours if you pay a specified amount of bitcoins. After the specified time the document will be automatically canceled. Since all participants receive the alert simultaneously, the code can’t be manipulated by anyone without knowing.
Smart contracts are useful for a wide range of scenarios, including credit enforcement, insurance, derivatives and financial products, legal agreements, crowd-funding, breach contracts, property law, and more.
This is the basic code of a smart contract. This was created on the Ethereum Blockchain. Any blockchain can encode contracts. Ethereum is the most popular because it has unlimited processing power.
A smart contract example on Ethereum.
A contract specifies that the person who created the contract will receive 10,000 BTCS. bitcoins). Anyone with sufficient balance can distribute BTCs.
Take a simple bet, such as the NBA Finals. You want to place a bet of $500 (or about one bitcoin) on the Cavs winning. Your friend, on the other hand, is wagering the same amount to win the championship. You and your friend should both place bitcoins in an account that is controlled by the contract. When the game ends and you and your friend have won, the smart contract will automatically credit your account with your bet as well as your friend’s winnings.
Computer programs are smart contracts. It would therefore be easy to include more complicated betting elements, such as odds or score differentials. These days, there are many services that can handle such a transaction. All of them charge fees. Smart contracts are different because they don’t need an intermediary, as it is decentralized and accessible by anyone.
A more common example would be online shopping. If you buy something online, it’s possible that you don’t want to pay the merchant right away. When they fulfill their part of the deal, you will be paying them. You could have an agreement that checks FedEx tracking information to ensure that your package has arrived at the address you specified.
Smart contracts: How can they be used?
The blockchain’s accuracy, transparency and automated system not only provide a trusted ledger, but it also reduces the possibility of snarls and delays in workflow and communication. Business operations are often slowed down while they wait for external or internal issues to be resolved. This is streamlined by a blockchain ledger, which also eliminates discrepancies caused by independent processing. It can lead to expensive lawsuits or settlement delays.
It is difficult to rig our voting system, according to insiders. Smart contracts, however, would eliminate all fears by creating a system that is infinitely safer. The ledger would have to be decoded, and it takes a lot of computing power. No one has this kind of computing power. Smart contracts may also increase voter participation. Inertia is largely due to a confusing system. It includes standing in line, proving your identity and filling out forms. Smart contracts will allow volunteers to transfer their voting online, and the millennials are expected to turn out in large numbers for their Potus.
In 2015, the Depository Trust & Clearing Corp. used a Blockchain ledger to process over $1.5 quadrillion in securities. This represents 345,000,000 transactions.
If-Then contracts are smart. To put it in Jeff Garziks’ words
Paper-based systems can stymie supply chains. Forms must be approved by multiple channels, increasing the risk of fraud and loss. To eliminate this, the blockchain offers a digital version that is accessible to all participants on the chain. It automates payment and tasks.
Barclays Corporate Bank uses smart contracts to automatically log changes of ownership and transfer payments to financial institutions on arrival.
Smart contracts will help you make more money. You would normally have to pay an intermediary such as Craigslist, or a paper to advertise your apartment if you were looking to rent it out. Someone would have to be paid to verify that the rent was actually paid and the tenant followed up. Ledgers reduce costs. You only need to pay with bitcoin, encode the contract in a ledger that everyone can see, and it will be automatically fulfilled. Hard money lenders, brokers and real estate agents can all benefit.
There is no question that we are moving from lazy pre human vertebrates towards super-smart robotics. Smart contracts can help you imagine a world where all processes are automated. Self-parking or autonomous vehicles is one example. Smart contracts can be used to detect fault by putting into action a kind of “oracle”, the sensor, or driver. Smart contracts could allow an automobile insurer to charge different rates depending on the location and conditions in which users operate their cars.
Personal health records can be encrypted and stored in the blockchain using a secret key that only allows access to certain individuals. This strategy can be applied to research conducted in a safe and secure manner, ensuring that HIPAA regulations are followed. Receipts for surgeries may be automatically stored and sent as proof of delivery to insurers. The ledger can be used for a variety of health-related tasks, including managing supplies and drugs, ensuring compliance with regulations, testing results, or even supervising drug sales.
Goodbye, Banks and Lawyers
When you consider the majority of financial transactions that are routine, lawyers and banks perform repetitive tasks. Yet we pay huge fees to banks for processing our mortgages or to lawyers for going through wills.
These processes could be automated and de-mystified by smart contracts. It will save ordinary people time and money.
You can get a mortgage through your bank. The bank will not hold your mortgage over the 30-year period. Instead, it sells your mortgage to an investor. You don’t pay the mortgage investor. The bank will continue to process your payments and you can keep paying them. Banks will pay a portion to tax, another to an investor and still more for homeowners insurance.
It’s a very simple operation. Rapoport says that the bank often charges a quarter or half percent of your mortgage each year to service it. They’re simply doing operational work by receiving and redirecting payments, and charging you. It’s possible to administer this with smart contracts. “
Smart contracts could eliminate mortgage processing fees and pass the savings on to customers. This would result in a lower cost of homeownership, which is great news for many people.
Although they’re still at a very early stage, smart contracts are proving to be a promising technology. A simple user interface could eliminate a lot of legal problems. This can be used to update your will, for example. Imagine allocating assets to your loved ones after you pass away was as easy as sliding an adjustable slider. Like the FedEx or bet example, once your smart contract verifies the trigger condition, which in this case is your death, then the contract will go into effect. Your assets will be divided up.
This may make it sound as if we will no longer need attorneys. Smart contracts are not meant to be a replacement for the legal system. Instead, they should be viewed as a way of evolving it.
Thomas: “I do not think this will replace our legal system.” This will be a layer in between transactions and court. “
Lawyers may have a very different future role. Lawyers may be asked to produce smart contract templates in a highly competitive market, rather than adjudicate on individual contracts. The quality of the contract, its ease-of-use, and customization would all be selling points.
Rapoport says, “I believe that people will come up with contracts that are different.” They can sell the contracts to others. This means that, if they create a good equity agreement with a lot of functionality for other companies to use.
Smart Property & the Internet of Things
All of this makes perfect sense if your entire estate is held in bitcoin. What if your possessions are physical and you have a real-world home? We call it smart property.
Ellis said that when talking about intelligent property, it started to sound more science-fictional. It is a constant growth of the so-called Internet of Things. Every day, there are more devices that can be interconnected. Some forward-looking developers have already begun working on methods to integrate the Internet of Things and bitcoin infrastructure. These developers want to see a token that can represent something physical, like bitcoin.
The new tokens for smart properties would allow ownership and control of a networked item, be it a computer or a vehicle, even a home. It is important to do this, not just represent an object.
Ellis uses the following example to rent out his home: “Let us say that all of the locks are network-connected and Internet enabled.” You and I have agreed on a smart contract that automatically unlocks your house when you pay the rent in bitcoin and use keys from your smartphone.
It would be easy to create a smart contract that would allow you to specify dates for when these digital keys will expire. This is similar but without Airbnb.
If you stop to think about it… that is great. Smart contracts want to make this fundamental change. Airbnb is a service that eliminates the need to have the hosts and guests trust each other. This makes it so attractive. Both the host and guest only have to rely on Airbnb. The host or guest can both take Airbnb to court if the other does not pay, and the key isn’t left.
Airbnb would be replaced by a similar sublet done with a smart contract. Both the homeowner and renter need only trust the smart contract, and do not need to have any trust in each other. Smart contracts will decentralize who is to be trusted and reduce the fees associated with brokering services such as Airbnb.
Smart contracts can complement existing business models as well. Nick Szabo first envisioned smart property in 1994, when he wrote an essay. In his essay from 1994, he said “smart properties could be created through embedding intelligent contracts into physical objects”, and cited a car as an example. The smart contract, he said, could automatically remove your digital keys for operating the car in the event that you missed a payment. This would be a great idea for car dealerships.
Smart Contracts Are Amazing!
Smart contracts: Here are the benefits you get from them
Trust — Your documents will be encrypted and stored on a ledger that is shared by all. No one can claim to have lost them.
Autonomy You are the only one who can make the contract. It means you don’t need to depend on an intermediary, such as a broker or lawyer to verify. In addition, because the execution of the order is controlled automatically by the system, and not by one or several individuals, who could be biased, there’s no risk that a third-party will manipulate the transaction.
Speed – You’d normally have to manually process documents and spend a lot of paperwork. Software code is used to automate smart contracts. This feature can save hours on a variety of business tasks.
Back-up — Imagine that your bank had lost all of your money and, on the Blockchain, every single one of your close friends would be there to help you. Your documents will be duplicated multiple times.
Accuracy – Automated contracting is faster and more cost effective. The automated contracts also eliminate the mistakes that can occur when filling in a large number of forms manually.
Security– The encryption of sites keeps your documents secure, so there’s no hacking. To crack and penetrate the code, it takes a hacker who is exceptionally smart.
Savings — Smart contracts eliminate the need for an intermediary. This saves you money. You would need to pay for a notary in order to verify your transactions.
Jeff Garzik owns blockchain service Bloq. Here is how describes smart contract:
Smart contracts… ensure a specific outcome and eliminate confusion. There is no need to litigate.
Is this justice for the poor?
It does sound like the beginnings of a dystopian sci fi film. If you are unable to pay, your car can be remotely and digitally repossessed. It would not require any human contact.
Financial institutions will be willing to risk lending money to people they might otherwise not have. It’s not important for the bank to keep the asset if the person can’t make payments. It’s the worst-case scenario.
Smart contracts can also provide access to legal services for those who are unable to pay on their own.
The law is supposed to treat everyone the same. You will often need to have money in order to sue someone for a contract breach.
Ellis stated that justice is only possible if one has the money to pay an attorney to enforce a contract. It will change the game once smart contracts are able to enforce their agreements by themselves.
In reality, it might not be so clean. This all seems good in theory. It’s difficult to know how a smart agreement would fare in court if it were challenged. The idea of removing lawyers from their position as high priests in the arbitration of contracts is appealing. Do we risk replacing legalese literacy with code literacy?
Rapoport acknowledged that the technology may have some drawbacks. He said, however, that it is easier for everyone to understand a contract written in English. This is still a very cutting-edge form of technology. We don’t yet know the kind of improvements that will eventually be brought to users.
Smart contracts have a lot to offer, even with their pitfalls. It’s still to be seen if Ethereum’s Codius or Ripple’s Codius can become useful and take off.
Ellis stated that many clever people are working on it right now. Because they see the potential, their ideas are ablaze. We don’t yet know which will win the race between Ripple and Ethereum.
There is much to learn about smart contracts. They are not perfect, but they can be very useful. What should the government do to regulate these contracts? What happens if there are bugs in the code? What would the government do with these smart contracts? Consider my situation with regard to renting a house.
What happens if you send the wrong code to your apartment? Bill Marino, a lawyer, points out that if I use the correct code but the apartment is already condemned by the time the date of rental arrives, what happens? If this was a traditional contract, I would be able to rescind the agreement in court. The blockchain, however, is an entirely different scenario and contracts are always performed.
Experts are working to solve the challenges. These critical issues do deter potential users from adopting the technology.
Smart Contracts: Here’s to the Future!
In order to make smart contracts a reality, it is important that these issues are resolved. Some lawyers insist, for example in Cornell Tech that smart contracts are going to be part of our daily lives. These researchers have devoted themselves to investigating these concerns.
Smart contracts are a bit like stepping onto a futuristic screen. Search Compliance , an IT resource centre, suggests smart contracts could impact certain industries. For example, lawyers may switch from producing traditional contract templates to smart contract templates that are standardized. The templates look similar to those found on legalZoom. Smart contracts are also used by other industries such as credit card companies, merchant acquiring firms, and accountants. These smart contracts can be used for real-time auditing or risk assessment. The website Blockchain Technologies describes it as a combination of digital and paper content. The contracts in this case are confirmed via the blockchain, and then substantiated with a physical copy.
Smart contracts can be processed on blockchains
bitcoin is great for processing Bitcoin transactions. It is limited in its ability to process documents.
NXT is NXT, a blockchain public platform. There is a small selection of smart contract templates. You cannot code anything of your own.
Side Chains is another term for the blockchains running adjacent to Bitcoin. This also allows for more flexibility in processing contracts.
Ethereum Ethereum is an open-source blockchain platform. It is the best platform for processing and coding smart contracts. You can do whatever you want with this. You will have to use “ETH” to purchase computer power.
Smart contracts have a wide range of applications, ranging from law to real estate, healthcare to automobiles and more. Gavin Wood is Ethereum’s CTO.
Smart contracts have the potential to change society in a significant way. This would be a technological basis for all kinds of social transformations. This is something I find very exciting.