Smart Contracts Explained

You’ve heard of them; you’ve scratched your head wondering what the heck. In this installment of Ask the ORACLE, we’ll be talking about smart contracts. Smart contracts explained as quickly and digestible as possible, from simple to complex, used for transactions like sending money or registering any kind of ownership and rights. Built on object-oriented logic, “if/when, then,” they automate payouts, process flows, and even settle disputes creating automatic market systems. Groovy. LFG.

Too lazy. Not wanna read? Here. Should read.🥚.

Most of us would never invest in a company we know nothing about. Nor lend money to some rando in another country or even agree to perform work for someone we’ve never met. Right? The risks involved, costs, and hassles would be too time-consuming and frustrating. Not to mention if things went wrong, a trusted intermediary would be required to settle disputes. While smart contracts aren’t legally binding and only as smart as the people writing them, they are a great start to solving the problems mentioned.

What is a smart contract?

No doubt you’ve scoured the web searching to figure out if you can get smart contracts explained. Anyone with a heartbeat has recently heard about NFTs and blockchain. What are these buggers? Where the heck did they come from? Why the fuck do you care? Smart contracts are programs or transaction protocols, like IKEA instructions that live on a blockchain. They’re supposed to automatically do what they do and call it a day based on the contract structure.

When the light says go, and predetermined conditions are met, trustless, autonomous, decentralized, and transparent processes are fired off. Automation is an engineer’s porn. I’ve never seen it personally but heard stories. They run through their routines and execute whatever tasks they are told to do. The thing is, they are irreversible and unmodifiable once deployed. So you need to make sure they’re tested and not full of mistakes.

When carried out this way, there isn’t a need for a central governing authority, legal system, or external mechanism to get involved. Therefore they reduce the need for intermediaries, arbitrations, and enforcement. 

Due to its voyeuristic nature, all participants know exactly how the smart contract hangs. Resolving concerns around the outcome, fraud losses, and reducing malicious and accidental scenarios. These dossiers of do-stuffs allow for exchanging money, property, shares, or anything of value in a distributed, decentralized manner, bundled into decentralized applications (dApps) to execute more complex functions.

Did you know?

This wouldn’t be a solid internet article if I didn’t barf back up the vending machine example. Vending machines are considered to be the first example of a smart contract. Rules are programmed into a device. You select a product by pressing a number. From there, you insert coins, and the machine checks if you inserted enough money. If yes, you get your item; the machine gives you change if you need change. If you didn’t put enough money, you wouldn’t get your item, or if the device didn’t have enough change, you’d get shorted. Automatic vending machines slashed transaction costs and expanded service, offering 24/7 availability. Smart contracts innovated the way stoners got snacks at government research facilities late at night, and they’ll revolutionize the world the same way today, tomorrow.

Quick history

In 1998, Nick Szabo invented “Bit Gold” to discuss computerized transaction protocols to describe objects rights management service layer of the “system.” Built around the idea that executing a contract for synthetic assets, such as derivatives and bonds, could create a new security. Basically like options trading. This illustration showed how complex term structures for payments could be standardized.

Interesting Facts/Events:

  • In 2015, the Depository Trust & Clearing Corp. (DTCC) used blockchain to process more than $1.5 quadrillion worth of securities, totaling 345 million transactions.
  • In 2017, with the Decree on Development of the Digital Economy, Belarus became the first-ever country to legalize smart contracts.
  • Several US states have passed legislation on smart contracts AZ, NV, TN, WY. Probably MOAR.
  • In 2020, Iowa’s House of Representatives passed a bill legally recognizing smart contracts.
  • In 2021, (UKJT) published Digital Dispute Resolution Rules (the Digital DR Rules) to help rapidly resolve blockchain and crypto legal disputes in Britain.

How does a smart contract work

The purpose of this article smart contracts explained is to inform you how the overall system works in a fun and easy-to-understand way. The whole idea is an abstract concept deeply tied to large-scale business solutions and infrastructures. Which makes it hard to grasp. Programmers and computer nerds forget that it’s difficult for normies to build mental models in their minds because not everyone is in tune with how to capture their inner visions.

Smart contracts work by following an “if/when then” statement. Meaning, computers do stuff when predetermined rulings have been met and verified. In the example about the vending machine, if you had the money, you got the goods. The same applies here. Examples could include releasing funds to all appropriate parties in a sale, registering a yacht, sending intellectual property, or writing a self-help novel. When the transaction happens, the blockchain is updated when everything is completed in any of those scenarios. At that point, that’s it. The transaction cannot be changed. Only parties with permission can see the results.

The wild thing about smart contracts is that they can have as many stipulations as needed. A smart contract can be programmed by a developer with a base knowledge in C since the internet is built on C and smart contracts typically work with Solidity. All parties need to establish the terms, participants, and how transactions and data are represented. If it is from complete scratch, they will need to explore all possible exceptions and define a framework for disputes.

Even though the name implies, it does not necessarily mean they are bound by existing law. A smart legal contract has all the elements of a legally enforceable contract in the jurisdiction it can be enforced.

US National Institute of Standards and Technology describes a “smart contract” as a “collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network.”

Another way to think of smart contracts is like a workflow process diagram or a task flow. The path that has to be followed to transfer some value between parties is outlined prior and strictly enforced. Once the process starts, a transaction is sent from a wallet. The transaction includes a code for the smart contract and an address. The transaction is plopped in a block and added to the blockchain. The smart contract is now logged in the books. 

Fancy words, a Byzantine fault-tolerant algorithm is what keeps all this shit safe and sound. 

Once deployed, a smart contract can store states and execute computations. If I write an article and set it to draft, its state gets established as a draft. Which might trigger a mechanism that notifies an editor to take a peek at what I’ve written since she might be better at grammar. Every time a smart contract interacts with it, it can trigger another series of interactions.

One of the value adds and pushes for blockchain technology is that a smart contract can be invoked from entities within and outside the blockchain. Data sets or “oracles” inject data relevant to the smart contract from an on-chain world into the smart contract information store. Oracles are real-time data feeds for blockchains. Oracles can be software or hardware-based.

Benefits of smart contract

If implemented correctly, smart contracts could be superior to traditional contract law, reducing coordination costs and enforcement of agreements. Tracking the performance in real-time as compliance and controlling. Smart contracts reduce negotiation expenses, formalize a deal, and enforce it. You might be wondering what makes smart contracts so tremendous or different? They sound like business rules automation software. Straight-up smart contracts can let businesses and people work together in a way more efficient manner, but that doesn’t mean they’re the cat’s meow. They can cross corporate boundaries and involve multiple organizations. Rules can be applied within the corporation that coded the smart contract and other business partners.

Benefits

  • Speed: efficient, isn’t dependent on human input, removes repetitive processes.
  • Efficiency: automation makes sure mistakes are avoided, helps with back-and-forth.
  • Savings: reduces operational costs, cuts out middlemen, less time to reconcile.
  • Reliability: uptime and backup of documents would need to hack the entire blockchain.

Smart contracts explain, cons and pushback

This wouldn’t be smart contracts explained if I didn’t touch on the cons and pushbacks about smart contracts. Since smart contracts reside in public ledgers, bugs and vulnerabilities are visible to all and may not be quickly fixed. There is no way to change the smart contract if there is a bug. A massive issue for the Ethereum network is how easy it is for anyone to create a contract. There is no central source documenting vulnerabilities, attacks, and problems.

Since security is an issue for smart contracts, just as it is for anything else. For them to become more secure, we need to implement more sophisticated contractual clauses and have things like decentralized dispute settlement tools. Which might take more time to come to fruition as this space matures. Smart contracts are only as smart as they’re designed. 

There’s no agreed standard on what a smart contract is. There is no verifiability, no way to know what’s running in the smart contract. You have to go to one source, table, and oracle for that data. Challenge to ensure that every network participant runs the same version of a smart contract. The biggest blocker? How would governments tax these smart contract transactions?

What are uses cases?

Smart contracts explained is about how we can learn about and use these bastards. Use cases for smart contracts are like NFT use cases and can be found everywhere. I’m sure I could pop off at the mouth about a billion different ways industries could apply smart contracts. They’re already located in banking, insurance, energy, e-government, telecommunications, music industry, art, mobility, education, and more. 

Literally, everything can use smart contracts to adopt a service-based economy. We’ve already got a blockchain platform for smart contracts and a Blockchain-as-a-Service model for all types of traditional legal contracts. There’s no doubt I could see this really exploding once people start to figure it out.

Subletting

Another internet article barf. Many of us are familiar with renting an Airbnb or subletting a home. A great example that has been given several times is the one below. Coincidentally real estate is already making big waves in helping to visualize use cases and get smart contracts explained to more people.

  • You rent an apartment.
  • Web3, blockchain paid in crypto.
  • Get receipt in a virtual contract.
  • The digital key comes by date.
  • No key? Refund
  • Before the rental date? Hold.
  • Done? Cancel agreement.

Both parties are sure that they get exactly what they want…

Data entry and input

The idea of an institutional revolution really excites me. Dealing with any type of government agency is such a pain in the ass. Most of them are not standardized or connected in any way, shape, or form. There’s a shit load of paperwork involved, and processes range so much. Smart contracts help reduce the need for paper-based systems with tons of conditions that lead to mistakes and fraud. They can also be used in voting systems. Smart contracts provide a more secure method to build trust in voting systems, protect identities when voting, and disrupt the voting tech.

Finance and investments

It wouldn’t be smart contracts explained if I didn’t chat shit about Defi. We all know quite a lot about financial use cases. Still, for those who don’t, banking and finance will lead the charge for innovation simply because they have the money. Defi, smart contracts allow for so much shit. Think of regular finance on drugs. Hardcore gateway drugs. I’m not even going to list everything like staking, yielding, and trading. Or financial derivatives, insurance premiums, breach contracts, property law, credit enforcement, financial services, legal processes, and crowdfunding agreements.

Supply chains and logistics

There can be a ton of use cases with supply chains. Large or small. I still think that infrastructure plays are the way to go in the near term. Those data HIGHways need to be built. In an event like supply chains, you could trigger alerts to systems along the logistics chain to interact with other smart contracts allowing for a multitude of automated systems, such as tracking and inventory control. I could see it working in a print-on-demand center where orders would trigger inventory management contracts, automating raw paper deliveries. I enjoyed a use case about when a cargo shipment reaches a port and IoT sensors inside the container confirm the contents have been unopened and remain appropriately stored throughout the journey.

Healthcare and prescription

I could go on all day about healthcare. I mean, seriously, where do I even start. Healthcare records could be stored with a private key, granting authorized access. Smart contracts could be applied to healthcare research ensuring standardization of studies and reports. Marketplaces could be built using NFTs to share IP amongst organizations. Data sets can be fed to ORACLES to create more comprehensive data lakes and information networks. New and better treatments could be discovered faster with decentralized information. Receipts for procedures can automatically be sent to insurance providers. They can supervise drugs, regulate compliance, test, and manage supplies.

Education services

Edtech has been bubbling up to the surface more lately and is a perfect candidate for institutional revolutions. I mean, common core math. I Could see smart contracts setting standards for how materials are produced and disseminated to students providing structured learning material and artifacts. I know personally, working with OpenUp Resources and Illustrative Mathematics, this is not the case. Your resources depend on your jurisdiction and the money that it has. I could see marketplaces that open up access to a plethora of knowledge. Basically, all business can be reinvented.

Companies using smart contracts

IBM and Pharma Portal are tracking temperature-controlled pharmaceuticals through the supply chain to provide trusted, reliable and accurate data across multiple parties. Home Depot uses smart contracts to quickly resolve disputes with vendors with real-time communication and supply chain visibility. We.trade uses standardization to reduce friction and risk while easing the trading process and expanding trade opportunities for participating companies and banks.

Chainlink created a smart contract that held fees until news article URLs reached – and maintained – rankings for some time, acting like escrow. UBS experimented with “smart bonds” that use the bitcoin blockchain that could hypothetically fully automate payments, creating a self-playing instrument. Barclays Corporate Bank uses smart contracts to log a change of ownership and automatically transfer payments to other financial institutions.

This article has 77+ use case examples.

Smart contract blockchains

  • Bitcoin
  • Cardano
  • Ethereum
  • EOS.IO
  • Tezos

Wrapping up

The institutional revolution is upon us. Large-scale organizations like government, healthcare, and education can share datasets and create standardizations. Blockchains and smart contracts worldwide can create micro-economies and service-based experiences.

Smart contracts allow for every agreement, process, task, and payment to have a digital record that could be identified, checked, stored, and shared. They’re able to remove administrative overhead, one of the most attractive features associated with blockchain technology. Fundamentally, the idea is you don’t have a central agent; instead, you have distributed nodes that participate, invalidating every transaction in the network.

With blockchain, we can: 

  • Build data lakes/sets and create accurate ORACLES
  • Create no-code/low-code smart contracts business rules
  • Develop a standardized method for accelerating data exchange
  • Increase efficiency in enabling processes between IoT devices
  • Fuse of legal contracts and smart contracts

Sources:

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Categorized as Crypto

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