SMART CONTRACTS AND ETHEREUM
A smart contract is a computer protocol designed to digitally facilitate, verify, or enforce contract negotiation or performance. Smart contracts enable the execution of credible transactions without the involvement of third parties.
One of the best aspects of blockchain technology is that, because it is a decentralized system between all authorized parties, there is no need to pay intermediaries (Middlemen), saving you time and dispute.
Of course, blockchains have flaws, but they are unquestionably faster, cheaper, and more secure than traditional systems, which is why banks and governments are adopting them.
Nick Szabo, a cryptographer, and legal researcher realized in 1994 that the decentralized ledger might be used for smart contracts, also known as self-executing contracts, blockchain contracts, or digital contracts.
Contracts of this type might be transformed to computer code, stored and replicated on the system, and supervised by the blockchain’s network of computers.
This would also result in ledger feedback, such as money being transferred and the product or service is received.
What exactly are Smart Contracts?
Smart contracts allow you to exchange money, property, shares, or anything else of value in a transparent, conflict-free manner without the use of an intermediary. The best approach to explain smart contracts is to compare them to vending machines.
Typically, you would go to a lawyer or a notary public, pay them, and wait for the document.
Then, insert a bitcoin into the vending machine (i.e., ledger), and your escrow, driver’s license, or whatever is deposited into your account.
Furthermore, smart contracts not only describe the rules and penalties governing an agreement in the same manner that regular contracts do, but they also automatically enforce those rules and penalties.
How do smart contracts function?
In a smart contract approach, an asset or currency is transferred into a program, “and the program runs this code and at some point, it automatically validates a condition, and it automatically determines whether the asset should go to one person or back to the other person, or whether it should be immunized,” explained Vitalik Buterin, the 22-year-old ethereum programmer, at a DC Blockchain Summit. Meanwhile, the decentralized ledger stores and replicates the document, providing it with security and immutability.
Example
Assume you are interested in renting an apartment from me. You may achieve this using the blockchain and cryptocurrencies. You receive a receipt stored in our virtual contract.
I provide you with the digital entrance key delivered to you by a given date. If the key does not arrive on time, the blockchain will provide a refund. If I send the key before the rental date, the function holds it and releases both the fee and the key to you and me when the date arrives.
The system is based on the If-Then logic and is observed by hundreds of people so that you can expect flawless delivery. I’m confident I’ll get paid if I give you the key. You will obtain the key if you send a specified number of bitcoins.
Because all participants are simultaneously alerted, the document is immediately canceled after the time, and the code cannot be interfered with without any of us knowing.
Smart contracts can be used in various contexts, including financial derivatives, insurance premiums, breach contracts, property law, credit enforcement, financial services, legal processes, and crowdfunding agreements.
Here’s How Smart Contracts Can Help You
According to Jerry Cuomo, IBM’s vice president of blockchain technology, smart contracts may be utilized across the board, from financial services to healthcare to insurance. Following are some examples:
Government
Insiders confirm that our voting method is complicated to rig, but smart contracts would alleviate these concerns by offering an infinitely more secure system.
First, ledger-protected votes would have to be decrypted, which would take a lot of computational power. Because no one has so much processing power, God would be required to hack the system! Second, smart contracts have the potential to increase low voter turnout.
Much of the inertia stems from a clumsy system that entails lining up, displaying your identity, and filling out forms. Volunteers may transmit voting online via smart contracts, and millennials will turn out in droves to vote for their Potus.
Management
Because of its precision, transparency, and automated system, the blockchain provides a single ledger as a source of confidence and reduces potential snarls in communication and workflow. Usually, business activities must endure a back-and-forth while awaiting approvals and resolving internal or external concerns.
This is made more accessible by using a blockchain ledger. However, it also eliminates common discrepancies with independent processing and can lead to costly lawsuits and settlement delays.
A case study
The Depository Trust & Clearing Corp. (DTCC) employed a blockchain ledger to process more than $1.5 quadrillion in securities, totaling 345 million transactions, in 2015.
The Supply Chain
Smart contracts operate on the If-Then basis, so, in the words of Jeff Garzik, “UPS may execute contracts that say, ‘If I collect cash on delivery at this place in a growing, emerging market, then this other [product] will trigger a supplier generating a new item because the previous item was just delivered in that developing market.”
All too often, supply chains are impeded by paper-based systems, in which paperwork must be approved through many channels, increasing the risk of loss and fraud.
The blockchain eliminates this by providing all stakeholders on the chain with a secure, accessible digital version and automating chores and payment.
A case study
Barclays Corporate Bank uses smart contracts to document a change of ownership and automatically transmit funds to other financial institutions upon arrival.
Automobile
There is no doubt that we are evolving from sluggish pre-human vertebrates to super-intelligent robots. Can you imagine a world where everything is mechanized? Google is making strides in this direction with smartphones, smart eyewear, and even smart cars. This is when smart contracts come in handy.
One example is self-driving or self-parking automobiles, where smart contracts may activate a sort of “oracle” that could determine who was at fault in a crash, the sensor or the driver, among a plethora of other circumstances.
Using smart contracts, an automobile insurance business might charge various premiums depending on where and under which clients drive their automobiles.
Real Estate
Smart contracts allow you to earn more money. Typically, if you wanted to rent out your flat to someone, you’d have to pay a middleman like Craigslist or a newspaper to advertise, and then you’d have to offer money to someone to confirm that the person paid rent and followed through.
Your expenses will be reduced as a result of the ledger. All you have to do is pay with bitcoin or ethereum and have your contract encoded on the ledger.
Everyone notices and you achieve automatic fulfillment. Brokers, real estate brokers, hard money lenders, and everyone else involved in the real estate game stand to benefit.
Healthcare
Personal health records might be encoded and kept on the blockchain using a private key that only particular individuals would access.
A similar technique might be used to ensure that research is conducted following HIPAA regulations (securely and confidentially). For example, surgery receipts might be maintained on a blockchain and automatically delivered to insurance providers as proof of delivery.
The ledger could also be utilized for general healthcare management, such as drug supervision, regulatory compliance, testing findings, and healthcare supply management. Smart Contracts are Fantastic! Here’s what smart contracts provide:
Autonomy:
You are the one who makes the deal; you do not need to rely on a broker, lawyer, or other intermediaries to ratify it. In addition, because execution is managed automatically by the network rather than by one or more potentially biased humans who may blunder, the risk of manipulation by a third party is eliminated.
Trust:
Your documents are encrypted and stored on a distributed ledger. Someone cannot claim to have lost their mind.
Backup:
Consider what would happen if your bank lost your savings account. On the blockchain, every single one of your buddies has your back. Your documents are replicated numerous times.
Security:
Cryptography, or website encryption, protects your papers safe. There is no tampering. In reality, cracking the system and infiltrating it would require an exceptionally gifted hacker.
Speed:
Manually processing documents would typically take a significant amount of time and paperwork. Smart contracts employ software code to automate functions, reducing the time required to complete various business procedures.
Savings:
Smart contracts save you money by eliminating the need for a middleman. You might have to pay a notary to witness your transaction, for example.
Accuracy:
Automated contracts are not only faster and less expensive, but they also avoid the errors that might occur when filling out a plethora of forms by hand.
Now, on to the challenges.
Smart contracts are not without flaws. What if the code has some bugs? Or, more specifically, how should governments regulate such contracts? Alternatively, how would governments tax-smart contract transactions?
As an example, recall my renting situation? What if I transmit the wrong code, or, as lawyer Bill Marino points out if I give the correct code, but my apartment is condemned (i.e., taken over for public use without my agreement) before the rental date arrives? Of course, I could revoke the contract in court if it were a standard contract, but the blockchain is a different story.
Whatever happens, the contract will be fulfilled. The list of difficulties is endless. Experts are working to resolve them, yet these crucial challenges deter potential users.
And now for the Future of Smart Contracts.
Entangling these challenges is an essential part of the future of smart contracts. Lawyers at Cornell Tech, who believe that smart contracts will become commonplace, for example, have dedicated themselves to examining these risks.
When it comes to smart contracts, we’re entering a sci-fi movie.
According to the IT resource center Search Compliance, smart contracts may impact changes in specific industries, such as law.
In that event, lawyers will shift from creating traditional contracts to creating standardized smart contract templates, similar to the conventional standardized contracts available on LegalZoom.
Smart contracts may also be used by other businesses, such as merchant acquirers, credit companies, and accountants, for duties such as real-time audits and risk assessments.
According to the Blockchain Technologies website, smart contracts will merge into paper and digital material, with contracts validated by blockchain and substantiated by a physical copy.
