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Hello, I hope you are doing great. Our world is witnessing a revolution in the world of finance. Just like the internet, there is a new technology in the market, that is revolutionizing the way people transfer value to each other. It could be currency tokens with varying utility, or it could be a digital identifier tagged to a physical one or a purely digital asset.
Lately, we have realized that markets and banks are binding to fall. They all are working in silos when the economy is completely global. Hence, creating invisible barriers for value, talent, and money to flow across the globe, seamlessly. Blockchain technology is breaking these barriers in a style, with support from people from across the globe.
The first Peer-to-Peer Electronic Cash System, Bitcoin is supported and maintained by thousands of volunteering nodes (Basically computer servers) that are present from diverse locations of the world. These nodes not only keep the system up and running, by continuously trying to create new blocks, but they also act as stewards to detect any malicious activity in the network. In return, these nodes earn rewards in the form of bitcoins. It is important to note, that not all the nodes earn block rewards all the time, but only the one that creates the next block on the Bitcoin blockchain.
In a similar manner, other blockchain protocols make sure that they reward their supporting nodes’ networks. At the end of the day, whatever benefit blockchain offers to normal people like you and me, comes out as an effect of a deeply distributed network of nodes.
Today, we will talk about another use case of blockchain technology, that holds the power to change so many things that we do in our day-to-day life. We will talk about Smart Contracts.
What are Contracts?
Simply, contracts are two parties, living or assumed, agreeing to do an activity, on a condition if some other event happens. Like two individuals agreeing to live with each other, provided both will love and care for each other. Marriage is also a contract, a social one, allowing two people to nourish a family together.
But, for a contract to be effective, it requires a third party, to hold the other two parties accountable, in case any of them deviates from the agreed terms of the contract. Like, generally contracts are executed on legal stamp papers, which make them eligible to be considered valid in a court of law. If any party deviates from the terms of the contract, the country’s judiciary can intervene, and either bring the parties in line or penalize them appropriately.
Marriages are also considered to be a social contract, with God acting as the third party. I wonder why people must go to a family court, to end a marriage, when that contract was written in the presence of God. The moment both decide that road ends for both together, God is already supporting both in it. Anyways, thank God, the same things don’t go for other relationships, maybe that is why we see a plethora of heartbreaks, and new relationships forming every day.
When do contracts become smart?
The moment there is no need for a third party to enforce a contract, and the contract can execute itself, once a certain event happens, it becomes a smart contract. The simplest example of a smart contract is a vending machine. It does not require a shopkeeper to first take money from you, check if the money is enough to buy the requested item, and if yes, it just picks the item and gives it to you. You enter currency in the vending machine, chose the item you want, and if the amount and currency are right, the item is automatically dispensed for you.
Now, the thing that we must consider here is that it is just us and the vending machine, there is no one else involved here. Two parties, dealing with each other, minding their business. But we know that vending machines are available for ages, then a logical question that creeps up is, that.
Why suddenly smart contracts making a fuss?
Smart contracts are making so much fuss suddenly because there is a new technology in the market known as Blockchain. Blockchain perfectly complements the scaling of smart contracts. Being an immutable and public ledger, blockchain provides the needed confidence in running self-executing contracts between two or multiple parties.
The Ethereum white paper was first described in 2013 by Vitalik Buterin, but the first (Genesis) block came into existence on 30th July 2015. It was the revolution in the lives of smart contracts. It enabled blockchain technology to communicate with external self-run scripts. These scripts can be uploaded to the network and will be run by all the nodes in the network.
These scripts (Smart Contracts) can be triggered by sending some transaction to the wallet address on which this smart contract is tagged to. Once the transaction is completed, the related benefits are automatically received by the sender, on an off-chain platform. Even if there is some issue with the platform, since the sender has valid transaction details, he/she can easily claim the benefit.
Here, I am assuming that the platform is acting fair. Or it can be just a rug pool. Rug pools are simple things, available in our society for ages. When someone convinces us to invest in an idea, and then run away with the money. So, beware! And Research!
I hope you got the idea, only by simply doing a transaction, all other services are unlocked for the sender automatically. This is a very simple use case of a smart contract. With blockchain immutability and openness, smart contracts are offering innovative ways for businesses to interact with their community. I will not say, customer, because, in this budding blockchain world, community is all that counts.
My intention behind taking this information to you is also to build a community. Community of smart people, who never want to give up on learning and leading. I hope you are liking it, I will love to hear from you if you see fit. 🙂
When we are talking about so many good things about smart contracts, there must be some limitations too. Indeed, my friends, there are:
Limitations of the smart contracts.
As we know already that nothing in the world is perfect, it is all subjective and based on the context. But, with every limitation, there comes an opportunity. In the world of smart contracts, I see two major challenges.
First, since smart contracts are purely code-driven, it is very important for the participating parties, to either have technical expertise in the same, or they need assurance/insurance that the coders have not written anything, that can cause any financial loss or leakage. Currently, the contracts executed in the business world could be very complicated and can have multiple milestones like structure, to reach the final goal of agreed value creation or value transfer. Hence, smart contracts need to take a long path to be relevant in the existing complex and closed-knitted financial world.
The second problem is the validity of the sources of the information. Suppose there is a smart contract written that penalizes a vehicle for speeding over a patch of a road. The Contract will also reward the vehicles, that are driving with the speeding limit of that road. Now, to execute it, the administrator must install equipment that can measure the speed of multiple vehicles on the road.
Since what’s written on the blockchain cannot be changed, the speed-measuring setup must work perfectly. Otherwise, the law-abiding vehicles might get penalized, and the non-deserving vehicles could win the rewards. Hence, the sources of information, from which the smart contracts get triggered, could be a weak link in the complete ecosystem. Though smart contracts can reward the information-providing parties, it does not rule out equipment malfunction, or human malintent.
The Ending Notes…
Smart contracts are the way, the world will try to do all its transactions in the coming future. It saves a lot of time and energy and ensures both parties will receive, what deems fit, and agreed. With the advent of blockchain technology, these smart contracts are now more secure and transparent. As the blockchain ecosystem will grow further, further complex smart contracts will start taking birth, and start living with us, easing, or speeding our life, in one way or another.
I hope, now you must be having a fair idea about what are smart contracts, and how are they so successful over blockchain technology. I will try to keep coming back to you with such ideas, in simple words, of course. 🙂
Till then, please consider trying to laugh a bit more, stay in the moment, and cherish the gifts, god has already given us.
My best wishes.Â
~R
Featured image credit: iPleaders
An Observer 