Smart Contracts

Imagine that.

I have a house.

I need to sell a house.

It is a complicated and challenging process,

which entails a lot of paperwork, communication with different firms and people as well as a high level of various risks.

That is why the absolute majority of house sellers decide to find an estate agent, who deals with all the paperwork, markets the property and acts as an intermediary when the negotiations begin, overseeing the deal until it’s closed.

Smart contracts

· use blockchain technology to verify, validate, capture and enforce agreed-upon terms between multiple parties.

· on the blockchain allow for transactions and agreements to be carried out among anonymous (unname) parties without the need for a central entity, external enforcement, or legal system.

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What is a Contract?

· Before deeply understanding the smart contracts, let’s remember the meaning of the term ‘contract’. A contract is a legally enforceable agreement between two or more parties.

· The execution of a traditional contract requires human validation to check the terms and conditions and decide the next steps according to the written agreement. Therefore, a traditional contract can be:

Time-consuming — checking the contract, validation, and approval, enabling next steps, etc.
Resource consuming — execution of a traditional contract may require human intervention.
Costly — it may involve a third party; this is even true during a dispute.

The more complex the contract is, the more it requires control and the more there is a risk of disputes. For example, this can involve several execution steps that enable specific actions or that give rise to certain privileges.

· There is another way to deal with a contract in a way that it overcomes these challenges and limitations mentioned previously.

· As technology evolves, the way we deal with contracts evolve, and the smart contract is born.

· However, what are smart contract?

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What Are Smart Contracts?

· So, what makes smart contracts so smart? Aside from the customizability and the digital signatures attached, smart contracts are smart because of their self-executing nature. In the legal paper world, when a contract is signed, the two parties are accountable to fulfil the terms of the agreement on their own.

· Smart contracts are translations of an agreement, including terms and conditions into a computational code (script).

· Blockchain developers write the script in a programming language like Java, C++, etc. in a way that it is void of ambiguity and does not lead to misinterpretation. The code translates a set of rules that are automatically executed and validated. A straightforward example is a translation of: “if X provides the service, Y pays for it.”

Smart contracts' code is uploaded into the blockchain to check the validity of a contract and enable required steps. From its initialization, a smart contract is automatically executed. The main difference between a smart contract and a traditional contract is that a smart contract doesn’t rely on a third party; cryptographic code enforces it.

We can consider a vending machine that is implementing a smart contract mechanically. It verifies the following properties:

There is no third-party involved in the transaction.
When you put your coin into the machine and select your product, it delivers the product directly to you, as long as you meet the terms and conditions — your coin has the same or higher value than the product you want to purchase.

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Difference Between

Contract vs Smart Contracts

Contract	Smart Contracts
Paper version of documents	Virtual document
Based on law and legislation	Based on the code
Legal language	Computer language
Terms of the contract can be changed, rewritten or interpreted differently	Terms of the contract cannot be changed as it is encoded in the blockchain
The help of a notary, a lawyer and appeals to public services	Excluding the intervention of third parties
Not Anonymous, personal meeting of two parties required	Anonymous, without personal presence
Transactions are conducted in currency through banks	Conducted using cryptocurrency
Exchange of values occurs instantly	The exchange of values occurs with delays
There are no guarantees. Any law can be circumvented	Guaranteed security of the transaction
Communication discrepancy	Conflict-free
You can change the conditions	All conditions are strictly followed
The probability of fraud, bribery, bribery is very high	Scam and fraud excluded
Legal assistance is needed to draw up a regular contract	The smart contract is quite difficult to make yourself

To better understand how smart contracts work,

let us first understand about blockchain.

The blockchain is a concept like a book in which we record information.

· The goals of the paper are to bring certification and secure digital documents using timestamps.

· Time stamping is done in a way that it is impossible to change the date in a given document.

· Therefore, it is easier to define which documents come first.

· One document that appears with a timestamp older than another document is created first.

This approach exploits the immutable nature of timestamps.

· This first proposition has evolved and technology, such as blockchain, has appeared and permitted the refinement of the first proposition.

· In the approach used by blockchain technology, documents are linked together in a block to form a chain.

· The blockchain is a linked data structure using hash pointers.

· Consequently, blockchain characteristics and technologies inherit hash functions' and hash pointers' characteristics.

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These characteristics are:

Any given input has a single output -

the hash.

The output is standardized -

a fixed size that is generally quite large to ensure it resists from a collision.

Easy to compute -

we can determine the time needed to calculate the hash value of input according to the input size.

These characteristics are essential since they ensure that:

Any transaction can be encrypted.
For any given transaction, the output has the same size.
For any given transaction, we can determine the computational time of its hash.

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When dealing with a transaction, security is a must. The hash function used by blockchain technology ensures this security.

· Since blockchain is a linked data structure, it contains data and a hash pointer that points to the previous data.

· Typically, transactions are linked to each other. Every transaction that has ever happened is recorded in the blockchain and is published.

Now that after understanding that transactions are recorded to form a blockchain, the next question is what is the relation between blockchain technology and a smart contract?

From Blockchain to Smart Contracts

A smart contract is defined and executed inside a distributed blockchain. Every transaction and contract execution must happen inside the blockchain. There are a few steps to enable this smart contract execution:

Blockchain developers write the smart contract as a script using a programming language. During the coding part, developers implement the logic behind the contract so that when a given action or transaction occurs, the script enables the following step.

Once the contract code is written, the script is sent out to the blockchain. A distributed network is used to execute the code. Typically, every computer made available for computation can execute the contract, and the output of the contract should be the same for identical input, regardless of the computer where it is executed.

Several conditions can be coded, and final smart contract users may choose the conditions needed for this smart contract.

Execution of a contract is run in a peer-to-peer way, which is very close to decentralization. Simple users connected to the Internet can often be clients. They have to install the client on the computer. We refer to this principle as mining. The computers used to run the program are called nodes.

Typically, everyone can create a contract and upload this contract in a specific transaction on the blockchain. Depending on the technology used, a specific virtual machine executes the code. Ethereum smart contracts, for instance, are executed on an Etherum virtual machine. The contract is funded, and, like in a traditional payment method, some APIs are made available to expose the contract so that it is enabled to perform transactions automatically, according to a specific agreement.

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How does Smart Contracts work?

Smart contracts are based on blockchain technology the decentralized system of which allows users to manage transactions, transfer information, and material value without banks and intermediaries. Smart contracts follow only the instructions given to them. Between the nodes of the platform, the contract is distributed and copied multiple times. The contract is performed in accordance with the contract terms after the trigger happens. The program checks the implementation of the commitments automatically.

Pros:

1. agent neutrality;

2. automation, time-saving: excludes human participation in transactions, everything is done by the prescribed program code;

3. safety: data in the decentralized registry cannot be lost and cyber attacked;

4. precision: no mistakes can be made due to the absence of hand-filled forms;

5. standardization: a variety of smart contract types, the possibility to choose change according to needs.

Cons:

1. Difficult to make corrections, it may bring mistakes into the system and make it less safe.

2. Human factor: perfectly and precisely code is needed.

3. Implementation costs: experienced coder not much cheap;

4. Uncertain legal status:

5. The new role of agents: programmers will need consultations for making new kinds of contracts.

6. Non-changeable terms encoded in the blockchain.

Most common use of smart contracts is the simple transfer of cryptocurrency assets.

1. Healthcare (transfer or access to the health record, Medical Research, Track Health);

2. Media (royalty payments to the artists following the criteria set in the contract);

3. Public Sector (Public information can be sent to the parties asking for them);

4. Cross-Industry (Product Provenance, Person-to-Person Transaction, Voting).

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Practical Applications of Smart Contracts

Insurance

Smart contracts offer significant potential across the insurance sector, in speeding up and streamlining the claims process. A simple example could be in the case of life insurance. The policy terms would be encoded into the smart contract. In the event of a passing, the notarized death certificate would be provided as the input trigger for the smart contract to release the payment to the named beneficiaries.

This can be extended across different types of insurance, providing that the insurer can find a suitable oracle for the input of external data in the event of a claim. For example, in the case of travel disruption, an insurer could use flight data provided by the airlines to serve as a smart contract trigger.

Supply Chain and Logistics

The use of smart contracts is revolutionizing the supply chain and logistics sector. By itself, blockchain can provide a transparent and permanent record of the transit of goods between multiple handlers. With smart contracts in play, payments can be executed automatically upon the receipt of delivery, and inventory levels updated automatically in real-time.

There are further benefits to be had by integrating blockchain and smart contracts with other technologies. For example, quality checks could be performed by artificial intelligence robots and then payments executed according to the outcome. Internet-of-Things (IoT) enabled smart containers could send data instructing a smart contract to hold back payment. This could happen, for example, if temperatures weren’t maintained throughout the transport of perishable goods, or if containers have been opened by an unauthorized individual.

Rights for Digital Token Holders

Tokenization of real-world assets may mean individual token-holders also have particular rights. These rights can be coded onto a smart contract. For example, if company stocks are tokenized, shareholders have voting rights. With a smart contract, the person’s right to vote is granted when any given ballot is opened up. The smart contract allows them to cast their vote and records everything in a transparent way. Thus, it allows voting from remote, relieving shareholders from the need to be physically present or name a power of attorney.