The euphoria around cryptocurrency, blockchain and decentralized systems is still raging. The experts even promise the revolution in the financial industry. Even if you understand what is Bitcoin and the blockchain technology it is based on you might not quite well understand why they say ‘it is going to change the world’. The technology will impact various aspects of our ordinary life but the smart contracts make the most interesting feature of cryptocurrency from the point of view of consumers. Fortunately, you don’t have to get a Ph.D. to sort out the most important aspects of the smart contracts.
Let’s first remember why there is so much fuss around the smart contracts now. The reason is that thanks to the latest achievements in the cryptography and decentralized computing it has become possible to conduct certain types of transactions in the digital space.
The necessary for the smart contracts infrastructure – blockchain – just recently developed up to the level where such contracts could be massively implemented.
In short, the blockchain is the distributed ledger that cannot be recoded thanks to the complex coding. The data is being stored not on the server of a company or a state body but on the computers of all the system participants. Once the record is made in such a ‘database’ it is impossible to get it out but at the same time to verify it is easy as the system is open access. It means no more bribery to change property rights, falsification of documents, and raiding.
The main stages of the smart contract implementation are:
As the operation of the smart contracts is similar to that of the computer programs, it is extremely important that they do exactly what the parties want. The effect is reached by the implementation of the relevant logics on the stage of the preparation of a smart contract. Programming code works as intended and is not a subject to any nuances of the human language. This allows automating what in the traditional contracts falls under ‘if…then…’
2. Distributed ledgers
After the 1stastage the code is encrypted and is sent to other computers through the distributed ledger network. The process can take place in the open uncontrolled blockchain (like Bitcoin) or through the controlled or hybrid ledger.
3. Implementation itself
When nodes receive the code, they agree on the results of the code implementation. Then the network updates the distributed ledger to register conclusion of the smart contract and then to control the implementation of all its conditions. Any activity within the system can be seen by all the participants. Therefore the performance of the contract doesn’t depend on either party.
- R3 Consortium (including 45 large financial organizations) works on the developments in the sphere of the blockchain application in the financial sphere; more than 15 participating banks have already the prototypes of the smart contracts to conduct factoring operations, having provided the participants with the opportunity to see the data on the deals in real time;
- Barclays (one of the largest financial conglomerates all over the world) uses smart contracts to automate payments and change of the rights of possession while conducting transactions;
- HSBC and Bank of America substituted letters of credits with the smart contracts.
- The German giant Allianz used the smart contracts to automate insurance compensations in case of force majeure;
- Dynamis start-up masters P2P-insurance providing standard services, i.e certificates of insurance.
The Swedish land survey Lantmäteriet together with the blockchain start-up ChromaWay, consulting firm Kairos Future and mobile provider Telia works on the development of their own blockchain solution. It is aimed to eliminate mistakes caused by manual data input and to increase the reliability of the document exchange. The digital documentation of real estate is made with the smart contract system.
They say it is possible to eliminate corruption and theft only by means of changing society and its institutions. However, it can be made much easier with the help of the computer technologies and first of all we are now speaking about the smart contracts. Nowadays, millions of dollars (predominantly in the USA) are being invested in smart contracts. Optimists promise the IT revolution similar to that the Internet once staged.