Smart contracts on blockchain can revolutionize contracting mechanisms

One of the important features of the blockchain is that it eliminates intermediaries by directly connecting the parties to the transaction. Blockchain can be used to conclude contracts that would not require interference or confirmation by either party.

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Inteligentne kontrakty na blockchain Business Insider Norbert Biedrzycki

My article in BUSINESS INSIDER published 18th of November 2018.

 

The last two years have brought a lot of publications and discussions about trends and technologies within artificial intelligence. This year, the attention of the media and bloggers is primarily caught by the blockchain. It is not perhaps a media theme like robotics, smart cities or autonomous vehicles, but it gains firepower every week. Every day I come across information about the technological and business consequences that the blockchain brings with it.

 

In my conversations with clients, this topic often appears as a priority. Intelligent blockchain-based contracts are very often the subject of our discussions, and the automation of many processes, decisions and tasks carries with it huge potential. I also observe that the taming of the new trend takes place on many levels of social life. It ceases to be a topic involving mainly investors in cryptocurrencies. And although for now the appetite is mainly for large financial institutions and the energy industry, its features mean that in a few years it can become something as common as e-mail or the Internet.

 

Intelligent contracts in a peer-to-peer network

One of the important features of the blockchain is that it eliminates intermediaries by directly connecting the parties to the transaction. In 1994, Nick Szabo, a lawyer and cryptologist, realized that blockchain could be used to conclude contracts that would not require interference or confirmation by any party, but which would be concluded automatically after meeting the terms of the contract. The idea of ​​intelligent contracts was created (smart contracts).

Under this agreement, contracts can be converted into a computer code, where an asset or currency is transferred to a block-based program. The program runs this code and automatically checks whether the condition entered in the contract occurred and, therefore, whether the asset should be paid to one of the parties to the transaction or whether it should be returned. In the meantime, the block (in the block chain) stores and replicates the contract, which ensures its security and immutability. This also results in automatic updating of information such as the transfer of assets or currencies and, for example, receipt of a product or service.

For example, payment for the ordered goods takes place automatically when the condition of payment is delivery of goods to the recipient’s warehouse or termination without any comments on the quality control of the delivered goods. The payment takes place without human intervention after the delivery of even a single piece, confirmed by the logistics system.

 

The advantages of smart contracts

Control, or rather its lack. A distributed system with verification of the implementation (or not) of the contract means that many parties constantly check, re-check and update records in blocks, and anything that is not in line with pre-established rules is rejected by other contract participants.

Security

The contract logic is run in parallel on all blockchain nodes, and the results are compared by all participants. Participants change only their own version of the block if they agree with the terms of the contract. The block is then replicated throughout the network. In theory, no one can deceive the blockchain.

Transparency and flexibility

The logic and contract mechanism is available to all blockchain users. Everyone can verify and run the same code. Of course, not an individual contract, they can only do its part. Just like the details of the contract can be only available to parties. If the conditions and contract logic are acceptable to others, then – to simplify it – everyone can duplicate it for their needs, modify it and start again.

Privacy

Privacy in a blockchain is a contentious issue, as I have already written many times. Existing blockchains offer a different degree of opportunity to run smart contracts. For example, NXT is a public platform that includes selected smart contracts. Unfortunately, at this stage of its development, you can not create your own contracts there. However, you can use existing templates. The most popular and probably the most advanced, and public, blockchain platform is probably Etherum. Theoretically, you can place any logic in the Ethereum contract. Unfortunately, technology is still complicated, and the language of contract logics, Solidity, difficult and demanding.

 

Read more in the full article.

 

Link to the full article (in Polish)

 

Related articles:

– Why do we care about blockchain technology?

– Blockchain – the ultimate financial crash

– Blockchain – the Holy Grail of the financial system?

– What is blockchain? All you need to know

– What are the bitcoins? All you need to know

– Blockchain has a potential to upend the key pillars of our society

 

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44 comments

  1. Zoeba Jones

    Even a quick poll of your colleagues/relatives and a quick skim of recent news will reveal that banks are actually not “really” bad, they are at worst “moderately” bad and at best “a little” bad. I wager there is a very high chance that none of your direct contacts lost any money in bank holding in the last decade.
    What I’m saying is that any serious competitor to banks must beat this statistics by a noticeable margin to succeed.

  2. SimonMcD

    If PII is controlled solely by a corrupt gov’t and does not allow for varification by the person to which the PII belongs, then this leads to potential forgery by the corrupt gov’t for nefarious purposes of the corrupt gov’t. China, Iran, NoKo, Venezuela, and many other countries come to mind that could/would manipulate a global or country-wide identity distributed ledger ID system for their own gain and control (i.e., labeling someone a terrorist who simply doesn’t agree with the views of a country). “Power corrupts, but absolute power corrupts absolutely.” (Lord Acton)

  3. Piotr

    I see there’s a potential use in payments and in smart contracts (although probably don’t fully understand these) but we can already do payments and contracts pretty well. Why would we want go through a huge upheaval to change it? What are the other potential uses? Please, do explain like I am actually a 5 year old, metaphors about candy etc. are welcome.

  4. CaffD

    ETH contracts are not really comparable to a legal contract. It would be comparable to a contract you may sign with your bank/insurance company where you commit to pay X amount every month. If you don’t pay that X then the bank may initiate legal proceedings against you. With ETH contracts the “mainnet”(the network where ETH contracts conduct their computations) can automatically trigger other events to happen if you don’t pay your X amount. But these events are limited to what some programmer can set it up to. So far I don’t think anyone has made anything to arrest people for breaking their ETH contracts. But you never know.

    The “contract” term in ETH development means a piece of code which can safely run in a Ethereum virtual machine. It doesn’t directly relate to the “contract” in law.

  5. johnbuzz3

    I mean it seems promising, but I have become skeptical since I interviewed at a large financial company and I got to witness how anti-innovative they are even when they talked about diving into blockchain technologies. So now whenever I hear big financial companies jumping into blockchain it seems to just buy hype.

  6. Simon GEE

    I think you’re a good storyteller, you should try to write a novel!

    Im now in my Dissertation for my doctoral degree in Information Technology here in the Philippines, I am eyeing Beyond Blockchain as a research topic because it is timely and interesting. This article of yours (IslandCoin) really catch my attention. Kudos to you my friend, more power!

    ‘I can see clearly now’ 🙂

    • tom lee

      A real boon for criminals. You don’t have to transfer ownership.. You just need possession. Oh the heists that could happen! Cryptopia and Mtgox would be dwarfed.

  7. Karel Doomm2

    Looking forward beyond the next few years the world economic and social outlook is unstable with the rich getting richer and the poor getting poorer. Banks are no longer trusted by their customers but they have little alternative. The social injustices of wealth today may lead to an economic revolution where bitcoin could be at the forefront bring in a new era where we all trade directly with each other and the world wealth is shared by all and controlled by the population. Its many years away but the technology behind bitcoin can help make the world a fairer place for all.

    • Adeptus99

      The “blockchain industry” shouldn’t even exist. It’s nonsense. It’s like saying the “mathematics industry” or the “for-loop industry”. Blockchain is a software algorithm for solving the need for centralized organizations, such as governments and businesses. So what on earth do centralized organizations want to do with such an algorithm, other than jump on it’s hype bandwagon?

      • tom lee

        I see two ways for it to happen. One is for a brokerage that owns X amount of a stock to promise to sell X tokens representing that stock and to, when ownership of some fraction of those tokens is transferred back to them, to transfer that fraction of the stock shares via the existing stock ownership method.

        That’s a question of the legal system holding brokerages that do that accountable.
        The other way is for a company to have its equity represented directly via tokens instead of traditional stock. And again, that only works if the government forces companies like that to keep their promises.

          • Zoeba Jones

            The book-buying example can be made transparent pretty easily.
            The price of a smart contract is already shown when using one, invalidating the claims of the author that the contract could steal your money.
            If buying digital goods with contracts is common in the future, there will be some standard contract for that, which your client will recognize. Thus the customer need not verify low level code.
            Many contracts could even be made out of human-readable building blocks. Or there could be an english-like DSL for contracts.
            For more complicated contracts, properties that are of interest to the user could be proved. Cardano’s Plutus will probably be able to support a language with theorem proving pretty easily.
            But of course, most of this doesn’t exist yet. Ethereum in its current state cannot support anything of interest, except maybe notarization, simply due to high cost.

    • AdaZombie

      “trusting technology is harder than trusting people.” This is an easy thing to say if you live in a high-trust culture with a reliable legal system, as is the case of North America, Europe, and a few other countries. Outside this region, things are very different. Unreliable legal systems mean that it is very hard to formalize trust, which limits the scope of economic activity to family and friends. Where I am living, Brazil, a contract is worth less than the paper it is written on, but if you *know* someone, then, wow, it’s important! My belief is that emerging markets will be the hotbed of blockchain adoption, and it will lead to nothing short of a global economic renaissance.

      What astonishes me is how few major companies are aware of this opportunity.

    • Adam Spark Two

      Crypto is an intersection of multiple disciplines, Nick Szabo has been talking about Smart Contracts since at least the mid 90s: http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html
      The concept of eCash has been discussed for a long time too e.g. see this by the NSA (National Security Agency) from 96: https://groups.csail.mit.edu/mac/classes/6.805/articles/money/nsamint/nsamint.htm
      There were a number of precursors to this, I just have these two links to hand.

  8. John McLean

    it always sounded to me like a bit of a waste of processing power, then I was shocked to see what it did to GPU prices.

  9. TomHarber

    An actually interesting, well though-out and articulate article on Medium.com? Is this a beginning of a new era?

  10. JohnE3

    This is a P2P technology. One way to see what kind of benefits it has is to compare it to similar technologies and extrapolate.
    Remember Napster? It was the first attempt at music piracy. This was like the banks: centralized with single points of failure.
    After everybody at Napster got busted and people started freaking out, then torrenting became popular. uTorrent and other clients made it possible to share files P2P. This is like blockchain technologies: P2P based system, decentralized…not totally anonymous but okay on VPN/TOR…
    Blockchain benefits over regular payment processors is almost the same benefits torrenting has against warez/centralized Napster-style file sharing platform.
    Smart contracts, though, are a whole other beast

  11. DDonovan

    Whenever there is an industry that requires multiple parties to interact and agree on things, like supply chains, financial clearing houses, and business contracts, the best solutions we have involve third party services coming in and enforcing deals. This is really expensive and time consuming, but necessary. While those third party services use technology to do the work, they are still run and operated by a lot of people and they exist to make a profit, which increases the price of all goods in the market. They exist because you have always had to trust the people running the technology, until blockchains came along.

    • John McLean

      Thank you for writing this. Hearing non-coders extolling the virtues of blockchain for the past few months has been incredibly frustrating.

    • Karel Doomm2

      As a technologist at heart, Ethereum Smart Contracts still remains the most promising and interesting blockchain technology but it is only part of a bigger picture. Saying that IPFS is set to change the way we store data and could truly revolutionize data storage and the internet.

    • tom lee

      The tokens would be centralized in some way tho, either the government are gonna recognize it as legally binding or the company can fork/make a new token for its stocks. So realistically if you pull a big heists you wont really get a way with it. So no crazy heists like some stealing +50% of all Apple stock and end up owning it.
      But still good for smaller things, but I doubt you can get a way with Mtgox level stuff.

  12. TommyG

    Anything can be owned (Money, Stocks, Asteroids and Ideas). Currently, things we own and transfer ownership of involve middlemen who extract value. Blockchains are the new middlemen who extract virtually no value.

  13. And99rew

    Moreover, most of all human arbitrage is based not on the technical language of a contract, but more on the logical implicit understanding of the two parties.
    If i buy a book from you, you could embed some tiny statement in your long ass policy that states that i won’t actually get my product. In the crypto currency world that would just be “too bad” for me. In the real world we realize that an unsophisticated consumer is not going to read that shit, and therefore we assume that when they purchase something they have a good faith, and reasonable, expectation that they will be getting the product. We realize that the relationship between consumer and provider is asymmetric, the provider will hold more expertise in the area, and they are therefore expected to protect and uphold the rights of the consumer.

  14. AndrewJo

    “Blockchain systems are supposed to be more trustworthy, but in fact they are the least trustworthy systems in the world. Today, in less than a decade, three successive top bitcoin exchanges have been hacked(…)”

    This is a straw man, a cryptocurrency cannot be said to be insecure because a centralized service loses their private keys, duh.

    You are BTW talking about poor hyped “blockchain solves everything” sort of new age technobabble the whole time, and of course anyone that knows what an actual crypto is (bitcoin, monero, ethereum) also knows that “blockchain technology” is an incredible over hyped buzzword term.
    Blockchain itself doesn’t solve shit, it is just a clever way to achieve a timeline of transactions built on consensus. Anything that is decentralized has poorer performance than the centralized version.
    But when you compare the amount of time and money saved, the degree of ownership of your own funds, the flexibility of sending it to anyone in the world 24/7, to legacy financial systems, it is clearly much superior.

    • Adeptus99

      It’s no surprise. Tech has gone through 100s of these buzzword trends in the past 20 years. Just like “Web Services” was a huge trend. What the hell is that? It’s just a way software can work, there is no “Web Services Industry”. People build APIs and you can call them a web service if they work on the web, but it’s not an industry.

      Blockchain certainly isn’t anything exciting, except to those who care about decentralization.

  15. CaffD

    Having a trusted party has some implications. When you send a payment today, you’re actually not the one changing the Paypal ledger. You have no power. You’re requesting, Paypal, who has full authority and trust over to change the ledger (add 10 to John Doe and -10 from me). It is the same with your bank. They can change terms, block payments, freeze accounts, or change balances at will (ex: Greece).

  16. Tom Jonezz

    Smart contracts are perhaps the most important feature of DLT pioneered originally by the Ethereum platform and has now gained wider acceptance & incorporation in the upcoming projects. These contracts let you exchange any two assets on a secure & transparent network without an intermediary.

  17. Jack666

    Excellent article, or at least first part. Looking forward

  18. DDonovan

    Money is arguably one of humanity’s most important inventions. From beaver pelts to gold bars, the form and function of money has constantly fluctuated throughout history. In the modern world, the definition of money is blurrier than ever. Central banks have opted to create trillions of dollars of currency out of thin air since the financial crisis – and on the flipside, you can actually use blockchain technology to create your own competing cryptocurrency in just a few clicks. Regardless of what is money and what is not, people are borrowing record amounts of it.

      • John McLean

        I hope that the people that believe this can remember their stance in 10 years. Not much else to say.

        • Jack23

          Blockchain != Bitcoin
          Bitcoin == Blockchain
          You can do a lot more with the Blockchain technology of immutable records (which it essentially boils down to). Unfortunately, due to poor programming there have been lost a great number of records (in this case cryptocurrency) in the past, because those records were no longer valid.
          So, please nobody tell anyone that
          a) This is safe to use
          b) There can be no error
          c) This is the “currency” of the future
          Because all of the above is simply and plainly incorrect.
          It is not safe, because it is not regulated (no oversight) and bad programming can/will result in you being broke in 10, if you use cryptocurrency.
          Of course there can be errors. Mainly for ther reasons above (no oversight) and entire “chains” can be “lost in space” because their backtracking was diluted and/or not properly kept.
          Again Blockchain != Bitcoin. Bitcoin aka Cryptocurrecy is the first use of the Blockchain technology (of immutable records). This was mainly (my personal view) to get rich quick on the inventor’s side.. The Blockchain technology is a great way to keep records i.e. for who owns which real estate and to whom was it sold, but it is far from “complete” or “error free”.

          • Norbert Biedrzycki  

            Blockchain explained – bitcoin example

            Blockchain explained - bitcoin example

          • Norbert Biedrzycki  

            Blockchain is struggling to emerge from pioneering age. Still no killer app except crypto @McKinsey

            Blockchain is struggling to emerge from pioneering age. Still no killer app except crypto

    • JohnE3

      Lets say we want to switch two cryptocurrencies. There is a cryptographical way to do this (Read up on Atomic swaps if you want to know more, but lets forget this since its not working for every currency).

      We write a smart contract where person A sends currency X to the smartcontract and person B sends currency Y to it too. If both are happy with it, they trigger the contract and if both agreed the tokens are swapped. Person A now has currency Y and person B now has currency X

    • ZoraBora

      A friend of mine was explaining the idea of smart contracts to me and started with “imagine that you wrote a contract as a bit of code and both people looked at it and were confident that it did was it was supposed to.” I had to stop him there. That hypothetical is absolutely impossible. I do this professionally, and most of my job is figuring out that the code that I thought I understood and tested and checked thoroughly didn’t 100% do what it was supposed to. And that’s without adding in the fact that the person who wrote the code will probably try to hide some behavior I’m not aware of. And this is how everyone is supposed to deal with contracts?

    • John McLean

      Hi Norbert, Excellent article that you have written. Very insightful. Have a great rest of the week.