We’ve mentioned smart contracts, blockchain technology and cryptocurrencies a fair amount recently. This is because they’re current, they’re relevant and they’re technology-related (and we love a bit of technology, here at Mòr). However, we’ve not delved properly into what these things are and what they can be used for, so let’s take a look now. In Smart Contracts: A Beginner’s Guide, we’ll explore smart contracts and tell you what you need to know.
What are smart contracts?
A smart contract is a self-executing process. Don’t be intimidated by the language – all this means is that something happens automatically. A smart contract is written in code and distributed among the nodes of a blockchain network. The fulfilment of it can be triggered by a specified event (e.g. “When X happens”) or when a certain date/time frame is reached (e.g. “On this date, do Y”).
What are they used for?
Money. Property. Shares. Anything that has one “rightful owner” can be traded online with a full, transparent record of the transaction. This record will be permanent and will be instantly transmitted to a number of nodes to prevent corruption in the future.
If you complete X work, by X date, I’ll pay you X amount. The work is marked as complete by one party and payment is automatically taken from the other party. This type of contract may need external input from another source to verify that the work has been carried out.
Organising Supply Chains:
Smart contracts work on the If-Then premise so, to put it in Jeff Garzik’s words (he’s a Bitcoin pioneer, in case you’re wondering),
“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.’”
Commonly, supply chains are hindered by paper-based systems, where forms have to pass through multiple channels for approval. This increases exposure to loss and fraud. The blockchain eliminates the risk by providing a secure, accessible digital version to all parties on the chain and automating tasks and payment.
Potential for Elections:
Voting results could be entered into Blockchain and distributed among the nodes of the network. Additionally, all the data is anonymous and will eliminate any manipulation with the ballot.
What are the pros and cons?
|Autonomy, Speed and Savings: Smart Contracts are brokered between the parties involved, with no need to for an intermediary, saving time (e.g. meetings, and form-filling) and money||Human factor: The codes are written by people, and people make mistakes. In the case of the DAO, a hacker exploited an error in the code and syphoned millions of dollars from transactions|
|Reliability: once the code (contract) is created, it is difficult to change and each node on the blockchain has a copy. It’s virtually impossible for a party to renege on the contract or to change the terms in an underhanded way||Reliability: once the code is locked in, it can’t be changed. If the situation changes or what is required from the contract alters, it’s not possible to just “update” the terms. Extra pieces would need to be added on to the block|
|Security: It’d be very difficult for someone to hack or alter your records. In addition, the documents are stored in such a way that their loss is almost impossible. The contracts are self-fulfilling and it is highly unlikely that anything would go wrong once the terms are set||Uncertain legal status: smart contracts are currently unregulated and therefore there is no legal recourse if anything DOES go wrong. In addition, if ever a legislative framework WAS introduced, it could potentially invalidate existing contracts that don’t fit the new guidelines|
|Standardization: There is a range of types of smart contracts available. It is a straightforward process to choose one and adapt it to better fit the requirements you have.||Initial implementation costs: Smart contracts cannot be performed without programming. It is essential to have an experienced coder on the staff to make fail-proof smart contracts and adopt the internal structure of the company for Blockchain technology|