Thursday, January 12, 2017

Smart Contracts and Blockchain

Smart contracts are computer protocols that can facilitate, verify or enforce the negotiation or performance of a contract or make a contractual clause unnecessary. They usually have a User Interface and can emulate the logic of contractual clauses. The can execute the terms of a contract in an automated way. They can make contractual clauses partially or fully self-executing and self-enforcing.

Usually users need to go to a lawyer or a notary and pay them to get the document. In case of smart contracts, one has to pay with cryptocurrency and the smart contract is created. A smart contract do not only define rules and penalties in an agreement, but also can enforce them in an automated way. It is usually written as code, that is placed in a blockchain. At triggering events like an expiration date etc the contract is executed according to the coded terms.

How is Blockchain used in Smart Contracts ?

Smart contracts are implemented using blockchain. Once a smart contract is created, it is placed in a blockchain. It typically works in the following way:

  • A user requests a transaction. The transaction can involve contracts, records or cryptocurrency.
  • The request is broadcast to a P2P network consisting of computers, called nodes.
  • The transaction and the user’s status are verified using known algorithms.
  • On successful verification, the verified transaction is added to a block along with other transactions.
  • The block is added to the blockchain.

Regulators can use the blockchain to learn about the current activities in the market. At the same time, the individuals involved can remain anonymous and maintain privacy.

An Example of using a Smart Contract

Let’s understand the whole concept with a very simple example.

Suppose Adam wants to rent a property from Bob. To do that, Adam would need to pay using cryptocurrency through blockchain. A smart contract would be created between Adam and Bob, where the terms will be written as a code. The smart contract would be placed in the blockchain.

Bob would then need to provide a digital key by the effective date of the agreement. On the effective date of the agreement, the appropriate terms would be executed and Adam would get the property, while Bob would get the payment. So, even if Bob releases the digital key before the effective date of the agreement, blockchain will hold the key and it will get released only the scheduled date. And, if Bob is unable to release the digital key, Adam would automatically get refunded. The terms of the smart contract will be automatically executed and the smart contract will get expired automatically after the scheduled period.

Advantages of Smart Contracts

There are a number of advantages of using a Smart Contract.

  • Smart Contracts eliminate the need of any intermediary like a broker, lawyer etc.
  • The documents are encrypted in blockchain, which makes it much more secure. Also, the involved parties can be anonymous and maintain privacy.
  • Usually a user has to spend lots of time for paperwork or to manually process documents. Smart contracts can automate the whole process, thereby saving time.
  • As smart contracts eliminate the need of intermediaries, it saves costs involved in the whole process.
  • As smart contracts are executed in an automated manner, it helps in avoiding errors that result from manual execution.

Applications of Smart Contracts

There are many applications of smart contracts.

  • One can use smart contracts for all sort of situations ranging from financial derivatives to insurance premiums, breach contracts, financial derivatives, credit enforcement, legal processes, property law or even crowd funding agreements.
  • Smart contracts can be used to facilitate business operations that usually go through lots of issues resulting from independent processing and lawsuits and settlement delays.
  • Smart contracts can be used in contracts involving shares, bonds or derivatives. It can also facilitate mortgage, which is often manual and confusing. Smart contracts can automate every aspect of the transaction including payment processing and signing mortgage agreements.
  • Smart contracts can be used in property transfers and can improve transaction integrity, efficiency and transparency.
  • Smart contracts can be used in supply chain along with IoT to track managed assets and products from factories.
  • Smart contracts can automate insurance claims and speed up processing, verification and payment.
  • Smart contracts can also be used in clinical trials and medical research studies to facilitate many sensitive agreements like involving cross-institutional data sharing.
  • Smart contracts can be used in cancer research automating patient data consent management and incentivizing data sharing.
  • Smart contracts can also be used in a blockchain protected voting system to facilitate secure voting and improve voter turnout.

Thus smart contracts can eliminate intermediaries in a contract and save time, extra costs and increase security in a negotiation. This was a short introduction to smart contracts. Hope it helped.

Read More

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