A Beginner’s Guide to Smart Contracts
By: Antonios Valamontes
Tags: Token Economy, Blockchain, Smart Contracts, Token Sale, Ethereum Blockchain

One of the best things about the blockchain is that, because it is a decentralized system that exists between all permitted parties, there’s no need to pay intermediaries (Middlemen) and it saves you time and conflict. Blockchains have their problems, but they are rated, undeniably, faster, cheaper, and more secure than traditional systems, which is why banks and governments are turning to them.

In 1994, Nick Szabo, a legal scholar, and cryptographer, realized that the decentralized ledger could be used for smart contracts, otherwise called self-executing contracts, blockchain contracts, or digital contracts. In this format, contracts could be converted to computer code, stored and replicated on the system and supervised by the network of computers that run the blockchain. This would also result in ledger feedback such as transferring money and receiving the product or service.

What are Smart Contracts?

Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.

The best way to describe smart contracts is to compare the technology to a vending machine. Ordinarily, you would go to a lawyer or a notary, pay them, and wait while you get the document. With smart contracts, you simply drop a bitcoin into the vending machine (i.e. ledger), and your escrow, driver’s license, or whatever drops into your account. More so, smart contracts not only define the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforce those obligations.

Example

Suppose you rent an apartment from me. You can do this through the blockchain by paying in cryptocurrency. You get a receipt which is held in our virtual contract; I give you the digital entry key which comes to you by a specified date. If the key doesn’t come on time, the blockchain releases a refund. If I send the key before the rental date, the function holds it releasing both the fee and key to you and me respectively when the date arrives. The system works on the If-Then premise and is witnessed by hundreds of people, so you can expect a faultless delivery. If I give you the key, I’m sure to be paid. If you send a certain amount in bitcoins, you receive the key. The document is automatically canceled after the time, and the code cannot be interfered by either of us without the other knowing since all participants are simultaneously alerted.

You can use smart contracts for all sort of situations that range from financial derivatives to insurance premiums, breach contracts, property law, credit enforcement, financial services, legal processes and crowdfunding agreements.

A Smart Contract Example

Here is the code for a basic smart contract that was written on the Ethereum blockchain. Contracts can be encoded on any blockchain, but Ethereum is mostly used since it gives unlimited processing capability.

Here’s How You Can Use Smart Contracts

Jerry Cuomo, vice president for blockchain technologies at IBM, believes smart contracts can be used all across the chain from financial services to healthcare to insurance. Here are some examples:

Government

Insiders vouch that it is extremely hard for our voting system to be rigged, but nonetheless, smart contracts would allay all concerns by providing an infinitely more secure system. Ledger-protected votes would need to be decoded and require excessive computing power to access. No one has that much computing power, so it would need God to hack the system! Secondly, smart contracts could hike low voter turnout. Much of the inertia comes from a fumbling system that includes lining up, showing your identity, and completing forms. With smart contracts, volunteers can transfer voting online and millennials will turn out en masse to vote for their Potus.

Management

The blockchain not only provides a single ledger as a source of trust, but also shaves possible snarls in communication and workflow because of its accuracy, transparency, and automated system. Ordinarily, business operations have to endure a back-and-forth, while waiting for approvals and for internal or external issues to sort themselves out. A blockchain ledger streamlines this. It also cuts out discrepancies that typically occur with independent processing and that may lead to costly lawsuits and settlement delays.

Case history

In 2015, the Depository Trust & Clearing Corp. (DTCC) used a blockchain ledger to process more than $1.5 quadrillion worth of securities, representing 345 million transactions.

Supply Chain

Smart contracts work on the If-Then premise so, to put in Jeff Garzik’s words,

“UPS can execute contracts that say, ‘If I receive cash on delivery at this location in a developing, emerging market, then this other [product], many, many links up the supply chain, will trigger a supplier creating a new item since the existing item was just delivered in that developing market.’”

All too often, supply chains are hampered by paper-based systems, where forms have to pass through numerous channels for approval, which increases exposure to loss and fraud. The blockchain nullifies this by providing a secure, accessible digital version to all parties on the chain and automates tasks and payment.

Case history

Barclays Corporate Bank uses smart contracts to log change of ownership and automatically transfer payments to other financial institutions upon arrival.

Automobile

There’s no doubt that we’re progressing from slothful pre-human vertebrates to super-smart robots. Think of a future where everything is automated. Google’s getting there with smartphones, smart glasses, and even smart cars. That’s where smart contracts help. One example is the self-autonomous or self-parking vehicles, where smart contracts could put into play a sort of ‘oracle’ that could detect who was at fault in a crash; the sensor or the driver, as well as countless other variables. Using smart contracts, an automobile insurance company could charge rates differently based on where, and under which, conditions customers are operating their vehicles.

Real Estate

You can get more money through smart contracts. Ordinarily, if you wanted to rent your apartment to someone, you’d need to pay a middleman such as Craigslist or a newspaper to advertise and then again you’d need to pay someone to confirm that the person paid rent and followed through. The ledger cuts your costs. All you do is pay via bitcoin and encode your contract on the ledger. Everyone sees, and you accomplish automatic fulfillment. Brokers, real estate agents, hard money lenders, and anyone associated with the property game can profit.

Healthcare

Personal health records could be encoded and stored on the blockchain with a private key which would grant access only to specific individuals. The same strategy could be used to ensure that research is conducted via HIPAA laws (in a secure and confidential way). Receipts of surgeries could be stored on a blockchain and automatically sent to insurance providers as proof-of-delivery. The ledger, too, could be used for general healthcare management, such as supervising drugs, regulation compliance, testing results, and managing healthcare supplies.

Personal Banking and Finance?

Smart Contracts are Awesome!

Here’s what smart contracts give you:

Autonomy — You’re the one making the agreement; there’s no need to rely on a broker, lawyer or other intermediaries to confirm. Incidentally, this also knocks out the danger of manipulation by a third party, since execution is managed automatically by the network, rather than by one or more, possibly biased, individuals who may err.

Trust & Safety — Your documents are encrypted on a shared ledger. There’s no way that someone can say they lost it. Cryptography, the encryption of websites, keeps your documents safe. There is no hacking. In fact, it would take an abnormally smart hacker to crack the code and infiltrate.

Backup — Imagine if your bank lost your savings account. On the blockchain, each and every one of your friends has your back. Your documents are duplicated many times over.

Savings — Smart contracts save you money since they knock out the presence of an intermediary. You would, for instance, have to pay a notary to witness your transaction.

Accuracy & Speed — Automated contracts are not only faster and cheaper but also avoid the errors that come from manually filling out heaps of forms. You’d ordinarily have to spend chunks of time and paperwork to manually process documents. Smart contracts use software code to automate tasks, thereby shaving hours off a range of business processes.

Here’s how Jeff Garzik, owner of blockchain services Bloq, described smart contracts:

“Smart contracts … guarantee a very, very specific set of outcomes. There’s never any confusion and there’s never any need for litigation.”

“Smart Contracts are where the rubber meets the road for businesses and blockchain technology. While a few highly specialized distributed financial services use cases for blockchain have appeared — for example, payment ledger services for the Yangon Stock Exchange in Myanmar. Its services on top of blockchain that are really interesting. In the Yangon Exchange, it solves the problem of distributed settlement in a trading system that only synchronizes trades twice a day. But the autonomous execution capacities of smart contracts extends the transactional security assurance of blockchain into situations where complex, evolving context transitions are required. And it’s this possibility that has Amazon, Microsoft Azure and IBM Bluemix rolling out Blockchain-as-a-Service (Baas) from the cloud.” — Patrick Hubbard, Head Geek, SolarWinds

“Banking on the Blockchain is a Smart Way to Save!”