What are smart contracts and how are they used ?

What are smart contracts?

Few years ago, a certain disruptive technology that was given to kids and online game lovers for free is currently attracting interesting headlines. Now it is hard for a week to pass without it featuring in financial and business news.

first generation millionaires

It has arguably created a lot of first generation millionaires within a shortest span than any other technology. What am I talking about? Crypto … 5 Promising ICOs to Watch for in November
As of September 2017, ICOs, or initial coin offerings, have raised over $2.3 billion. This amounts to almost $8.5 million a day.

There was an incredible stretch over the four months beginning in Q2–$103 million was raised in April, $232 million in May, $462 million in June, and $574 in July. ICOs have become an attractive counterpart to traditional IPOs and venture capitalism, … Quantstamp solidifies partnership with Experty for smart contract consulting.

Over the past several months, there has been an explosion of ICOs and new smart contracts.

The blockchain industry has been growing exponentially.

Smart contracts are an integral part of the Ethereum blockchain technology which enables businesses to conduct transactions without an intermediary. Smart contracts are the basis of all Ethereum blockchain based firms. Smart … Aida Announces Update on Greenstream Acquisition and Development of Best in Industry Blockchain Technology Solution
VANCOUVER, British Columbia, Nov. 06, 2017 (GLOBE NEWSWIRE) — Aida Minerals Corp. (“Aida” or the “Company”) (CSE:AMC) (Frankfurt:2AD.F) is pleased to announce that it is nearing finalization of its due diligence on the previously announced 100% acquisition of 10375977 Canada Inc., (October 6, 2017), a blockchain technology company doing business as Greenstream (“Greenstream”).

… Stampery Demonstrates Timestamping on Public Blockchains like Bitcoin and Litecoin
Stampery, a blockchain startup, has demonstrated that timestamping on public blockchains can be made possible through robust software and actual immutable platforms without the necessity of permissioned and centralized blockchain networks.

Utilization of Secure Public Blockchains Like Bitcoin and Ethereum Instead of Permissioned Ledgers For many years, since 2014,

Smart contracts

Coined by the computer scientist Nick Szabo in 1994, the term “smart contract” is somewhat misleading. “A ‘smart contract’ is a computer code, which unlike most, isn’t installed on a personal computer or a server,” explains Pablo F. Burgueño, Chief Legal Officer at Nevtrace, a company that has advised the European Commission on smart contracts and cryptocurrencies. The code is registered in a blockchain so it cannot be erased or edited.

What are its main advantages of smart contracts?

The computer code is based on a very basic premise: if X occurs, execute Y. For example, if a plane is delayed more than half an hour, compensate the passengers with 10% of the price of the flight. In the real word, these types of agreements involve paperwork, but a report by the consulting firm Cap Gemini states that: “Classic financial contracts simply don’t work for the digital economy. Using a physical medium means delays and inefficiencies, and increases the likelihood of mistakes and fraud.”

the terms of the transaction are written in a computer code located in the blockchain and crypto-graphically signed by the parties involved, which shall be implemented when the expected conditions are met. Everything is in blockchain, which means that it is transparent for all parties and cannot be modified.

This makes transactions among strangers possible without the need for a third party to act as a trustworthy intermediary to validate the transaction. All parties have access to the same information at the same time. It eliminates paperwork, saves time and gets rid of nearly 100% of the risk of fraud and misunderstandings.

what are the disadvantages of smart contracts ?

The immutability, or unchangeable nature of blockchain, is an advantage, but it can also be a problem. As Cap Gemini says, “Smart contracts written as computer programs in blockchain mean that once an agreement has been reached, it cannot be easily modified. And this causes problems in real life situations.”  “Escape windows” that make it possible to pre-program ways to change the terms of an agreement through addendas, modifications and cancellations are being investigated. However, they are technically complicated and could make smart contracts less effective, as their effectiveness is based on their simplicity.

The transparency of blockchain is not all good. Do you think that companies want their competitors to know about the conditions of their smart contracts? And what about consumer data protection? a hot topic at this day and age.

Burgueño stresses that encrypting the users’ data that is put on blockchain is not enough. This would be in violation of the Data Protection Law. The answer is to separate the data that includes personal information and put it in a repository, so that only the company in question can relate it to what is written in the blockchain. It’s a solution, but there is a risk of the repository being hackedsmart contracts

In the future, another possible solution to solve this risk would be the use of decentralised IPFS storage systems (InterPlanetary File System), a new internet protocol that enables the creation of distributed applications.

Security is another big concern about the computer code. The contents in blockchain cannot be hacked, but very serious mistakes can occur. What happened with the DAO is a grave warning.

The DAO was a decentralized, autonomous organization (hence the acronym DAO) that raised the equivalent of $160 million in the ether cryptocurrency to invest in projects related to the decentralized economy. It was all based on smart contracts, but the problem arose when a hacker found a mistake in the computer code and used it to keep part of the money. The promoters reacted by creating an ether split, therefore minimizing the theft. However, the hacker still managed to get away with approximately two million dollars.

How are smart contracts being used today?

The use of smart contracts is tied to cryptocurrencies: they cannot order payments to bank accounts in euros, dollars or pounds. But innovation is moving quickly, and private consortium are already using private blockchains – with cryptocurrencies and smart contracts – to manage their business relations.

As for how traditional financial institutions are using these solutions, the Cap Gemini report points to many different benefits. For example, investment banks could reduce the time it takes to perform transactions by more than half, lowering operational costs and increasing demand and revenue. Meanwhile, customers would also benefit from lower car insurance premiums and lower mortgage costs. Smart contracts have tremendous potential, but greater standardization and widespread use of blockchain are still needed, concluded a 2015  BBVA Research report.

BBVA is collaborating with R3 consortium in an initiative that aims to re-desing the trade finance infrastructure by building a smart contracts standard supported by a DLT technology.