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Smart contracts - How smart are they?

Terms of a relationship in standard contracts are enforced by laws. How about

Smart Contracts on a Blockchain?

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Smart Contracts - How smart are they
Smart Contracts - How smart are they?

What are Smart Contracts?

A smart contract is a computer protocol running on top of a blockchain, with an encrypted set of rules between the permitted parties on which they interact and perform transactions without the need of intermediaries.

The negotiation or the performance of an agreement or a transaction are not only pre-defined by smart contracts, but are also enforced by them using lines of cryptographic code.

Smart contracts were first proposed in 1994 by Nick Szabo, an American computer scientist who invented a virtual currency called “Bit Gold” in 1998, 11 years before the invention of Bitcoin. Regard to that, Szabo is often rumored to be the real Satoshi Nakamoto, the anonymous inventor of Bitcoin, which he has denied.

Based on Szabo’s proposal, smart contracts, also known as self-executing contracts, blockchain contracts, or digital contracts, were described as a kind of digital vending machine. However, as he stated, smart contracts went beyond that in proposing to embed contracts in all sorts of property that is valuable and controlled by digital means.

Smart contracts were described as a kind of digital vending machine
Smart contracts were described as a kind of digital vending machine

In more details, Szabo described how “new advances in replicated database technology” would allow the blockchain-based system to store a metadata of who owns what land, creating a complex structure including the concepts of homesteading, adverse possession, and Georgian land tax. The benefits of smart contracts would result in reducing transaction costs and rendering transactions traceable, transparent, and irreversible.

However, the implementation of smart contracts didn’t happen since there was no effective replicated database system available at that time, until Bitcoin along with its Blockchain appeared. The Bitcoin blockchain was the first to provide a suitable environment supporting basic smart contracts, as its network can transfer value from one person to another. These transactions will only be validated by the network of nodes if certain conditions are met. Nonetheless, Bitcoin is limited to the currency use case.

Ethereum replaces Bitcoin’s more restrictive language with a language that enables developers to create their own decentralized application platforms with their own smart contracts, or ‘autonomous agents’ as mentioned in Ethereum white paper. ‘Turing-complete’ language in Ethereum is intended to support a broader set of computational instructions.

Ethereum Smart Contracts
Ethereum Smart Contracts

How can we use Smart Contracts?

In brief, smart contracts can:

  • Function as "multi-signature" accounts, that means transactions are executed only when a required percentage of people agree.

  • Manage agreements between parties without the need of intermediaries.

  • Store transaction data (domain registration information or membership records).

  • Work as a software library which provides utility to other contracts.

While the governments, banks and financial regulators have been shifting their awareness towards cryptocurrencies from extremely cautious to carefully accepting, the technology supporting them - Blockchain and smart contracts - has been widely acknowledged as revolutionary technology. The result is the implementation of the technology in many levels.

Recently, the Depository Trust and Clearing Corporation (DTCC) and four major banks - Bank of America Merrill Lynch, Citi, Credit Suisse and J.P. Morgan - has achieved conspicuous success on using smart contracts to trade credit default swaps . The smart contract in this use case filed individual trade details and counterparts risk metrics. According to a press release, the technology provided a new level of transparency for partners and regulators.

Similar things are happening globally. Sberbank, a national bank of Russia - a country known as ‘cryptocurrency anti’, has been testing the Ethereum Blockchain and its smart contracts in their system. This act only came to light when Sberbank participated in the Enterprise Ethereum Alliance - an association of more than 100 businesses including Microsoft, Cisco, ING etc, with the aim of developing blockchain technology for business-use, where smart contracts can be developed and implemented for particular companies.

At present, smart contracts are mostly being implemented into the finance and banking field as they are developed in association with cryptocurrencies. However, there are countless other industries that can benefit from the implementation of smart contracts.

Governments can apply this technology to make the voting system more transparent and accessible.

Supply chains can use it to monitor and automate all the goods transmissions, tasks, and payments involved.

In real estate, smart contracts help cut down the costs of hiring intermediaries. Instead of paying for the middlemen to manage your transaction, you can write you own smart contract on the ledger. The shared ledger can provide complete transparency to all parties, in which buyers and sellers are able to interact and negotiate on terms of agreement tied to value. Every stage of the transaction will automatically be executed only if the conditions encrypted in the smart contract are met.

<a href="">House photo created by -</a>
In real estate, smart contracts help cut down the costs of hiring intermediaries.

Smart contracts can be implemented in the Healthcare industry to help maintain patients information and other important clinical data in an immutable state. Health records and information of a patient are stored securely in a reliable and transparent manner so that patients can move from one hospital to another without having to fill numerous forms. They can simply assign preferred physicians to view their health records and track treatment activities for purposes of insurance payments. Smart contracts also help facilitate standards and regulatory compliance in case there are changes in the procedures.

Blockchain and Smart Contracts technology guarantee that all the data cannot be manipulated or removed, giving patients control over their data.

<a href="">Technology photo created by creativeart -</a>
Smart contracts help maintain patients information and other important clinical data in an immutable state


The fact that Smart Contract is still an extremely young technology, the implementation of it might come a bit later to some industries than others, depending on certain governments and regulators. However, with such promises aforementioned, the technology will assuredly be perfected over time and will move on to more complex use cases to become the integral part of our society.

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