An insider look into Smart Contracts

An insider look into Smart Contracts

By | 2018-08-18T14:11:16+00:00 July 2nd, 2018|

Let us first begin with defining a contract: A set of rules that are defined and agreed upon by multiple parties. All parties have a copy of the agreed contract that they refer when necessary. A quick way to verify a specific rule is to check the contract text itself — once you claim something on the contract others will also check if the text is also included in their copy. If yes, then they adhere to the rules of that contract. This is how today’s “offline” contracts work. However, this can and probably will change in the coming years with a breakthrough called “Smart Contracts”. If you are familiar with Ethereum and Blockchains, you probably have heard this term before, as most Initial Coin Offerings (ICO) are using custom smart contracts in one way or another to issue tokens, distribute them across a pool of investors, and much more.

Nick Szabo first coined the term “Smart Contract” in his article titled “Formalizing and securing relationships on public networks”. This is the first theoretical explanation of a “smart contract”. Smart Contracts have evolved from the below technologies.

Computers

This allows the contract to be read by the machines which enables the contract to be infinitely copied and shared

Internet

This allows the contract to be shared online and readable by other machines on the network.

Worldwide Web

This enables the contract to be accessible by anyone from anywhere.

Cryptography

Invention of a framework that nearly impossible to crack cryptographically.

Blockchain

Allows a cryptographically secured decentralized clearing house for transactions and smart contracts to co-exist.

Ethereum’s rise

The first smart contract ready platform created was Ethereum. Its technology and the underlying blockchain allows smart contracts to be created and executed on its public ledger. Since Ethereum is widely known as one of the first places where smart contracts can be created, its value has appreciated over time and especially in the last few months where it saw 18x returns (in terms of USD). This proves that the market is indeed bullish on the fact that smart contracts will be used in the future and most of these contracts will be created on Ethereum’s platform.

Spotify + Mediachain

Recently Spotify acquired a startup called “Mediachain”. This startup is working on ways to make sure that creators work can be verified and attributed on a decentralized system. Think of it this way – if you are a freelance illustrator and you are loading your images on a public social media page, others can copy this image and re-use it as they like. There is no easy way to track if your work is being used for commercial or illicit use in the vast ocean of the public internet. Anyone can claim an artwork or a song online and possibly secure some illegal profit from it.

What Mediachain is trying to do is to ensure that every media is cryptographically signed on a permissionless ledger. This helps everyone on that “mediachain” network secure the media on the blockchain. Using that same blockchain, anyone can verify ownership of a specific song or artwork. This is being done by using a decentralized network where every node agrees (reaches consensus) to who owns which media. Enabling a serial witnessing of the new entries that are cryptographically signed and uniquely identified on the blockchain.

A possible use case for Spotify can be as follows: Spotify pays royalties to artists according to the consumption rate of their songs. Through an artist dashboard, Spotify shares usage statistics with the artist which shows how much it is being listened to and thereby, what the expected royalties will be for them. In this setup the artist places trust on Spotify that it is showing accurate usage statistics, however, Spotify could easily alter the numbers if it wants to pay the media owner less money. Alternatively, a smart contract can be built into the Spotify royalties program itself which would mean that the entire Spotify network can be permissionless and decentralized, leading to automated royalty payments. This would allow for anyone who is running a node in that network to view and verify the play counts of their own songs. Exact royalty payout numbers can be hidden if necessary as the play count would be conclusive that the system can be trusted because the artists no longer needed to place trust in “Spotify”, and this conflict of interest (Spotify may be incentivized to lower play counts to pay media owners less; they, of course, may not be doing this by any means, however, the possibility exists). Therefore, to summarize: a smart contract can be created that contains automatically triggered payments to content owners based on their media play count.

Autonomous vending machine

Another use case for a smart contract would be a fully automated vending machine. For this to work correctly, the vending machine would need to be online 24/7. It would track its supply and can automatically order new goods as they become low in stock.

For example, a smart contract is created and agreed upon between two companies, tentatively named Company X and Company Y. Company X agrees to pay 3 USD / unit for Item A. Company Y is agreeing to pay once the delivery is verified by Company X’s vending machine. This configuration, visualized below, would drastically supply chain costs, inventory expiration and improve replenishment levels.

The Future

Smart contracts would ultimately lead to the digitization of some of the most complex existing contracts – this implies that the information we use, transfer, and buy/sell would need to be connected and digitized in order for it to connect to a smart contract; this is possible using centralized or decentralized Oracles technology, and these smart contract rules can then be automatically triggered.

Smart contracts will inevitably disrupt many industries. You may be asking yourself – why aren’t more people using them now? Here are a few preliminary reasons:

●       Blockchains and Cryptocurrencies are very new to people and it is not easy for the public to understand the fundamentals of how these technologies work.

●       Experimental era for Smart Contracts: we are very early in the development stage and can not put smart contracts online because they needs to be tested thoroughly before they can be used for large scale operations.

●       Digitization and lack of connectivity: for smart contracts to work, for example in a vending machine (to order itself a pack of cokes to be delivered by drone), these devices need to be online 24/7 so that they can always be connected and ensure that the terms of the contract can be retrieved anytime, anywhere. Most of the devices and appliances today are not connected to the internet continuously and their data is not always digitized, therefore, the smart contract in this case would not work; it is just a matter of time until most devices we interact with today are connected to the internet 24/7.

As the impact of blockchain and advanced Internet technology is felt – smart contracts will certainly be hailed as one of the new “internet” technologies that will have a long-lasting effect on our day to day lives. A smart contract might possibly be the next “currency” application that will gain popularity worldwide in 2018; companies such as ChainLink are helping push this initiative forward. Expect quite a bit of media frenzy around this technology. It will indeed change quite a bit around us, and of course, reduce some of the hassles we are confronted with every day in legacy paper contracts.