There is not a day that we do not find news and advances in the world of blockchain technology. The decentralized blockchain has completely caught the interest of the public. The claim of a hopeful revolution in the financial industry has served so that the generalist press does not turn the media eye away from crypto currencies such as Bitcoin or Ethereum. In fact, today, the term crypto currency is no stranger to the general public and even some public institutions have decided to bet on the development of a local ICO.
What Is a Smart Contract?
A smart contract is a computer code or protocol that makes it easy to automatically verify and enforce a contract. Although there is discussion about the need or not to go to external agents to execute the envisaged condition, what is clear is that they will bring agility to the business sector. These contracts work on the blockchain and, a priori, do not need human intervention to verify and enforce compliance.
As an example, it is customary to explain the case of a bookmaker. Suppose we want to bet an amount of money X that Manchester United win the league. For this we should create a neutral account controlled by a smart contract, to which each of the parties should pay X crypto currencies. Once the league is over, if MU has been the winner, the contract itself will access an official database, check the winner of the football league and automatically send the funds to the winner of the bet.
Systems such as PayPal currently use so-called deposit contracts, through which an intermediary known as an escrow agent audits compliance with certain conditions agreed in the contract to activate, where appropriate, the protocols that allow that transaction to be carried out. Despite the agility of PayPal, the potential of this technology allows us to do without the intermediary itself, that is, PayPal, and also guarantees the execution of the transaction without giving up current security. In this area, Ethereum is currently the most prominent smart contracts platform on the network. Ethereum is considered very secure because it is an isolated blockchain system that even experienced hackers can break into. Because of its security, Ethereum is the number one platform for modern companies to make agreements that are free of manipulation and interference.
Why So Much Expectation?
The main reason for the expectation generated by the appearance of smart contracts is due to the possibility that blockchain offers to allow people, by themselves, to enforce contracts in the real world without the need for a physical intermediary, that is, without the need for a judge or referee. As an example, currently, when faced with the breach of a contract by any of the related parties, the compensation mechanism for damages involves going to an intermediary, provided and supported by the public power.
This intermediary receives the coercive power of the state to enforce the principle of safeguarding our rights. Therefore, without the figure of the intermediary, neither party can fully comply with their rights. In addition, in case of financial compensation, we also need the intermediary figure of a financial institution that is responsible for making the bank transfer of funds from one account to another. Consequently, effective compliance slows down notably and is made dependent on subjective figures liable to incur errors.
In the insurance industry, it is easy to predict the success of smart contracts. Currently, even a simple claim can take several weeks to resolve, with the personnel costs involved in this bureaucratic process. Smart contracts work exceptionally when we try to regulate payment terms. For example, if we take out insurance that covers us against adverse weather conditions, we could wake up the next morning to find that we have received payment before even knowing that we had suffered a loss.
In loan contracts, the smart contract allows us to automatically revoke the digital keys to access funds in the event that the debtor does not make the corresponding payment. In contracts for the sale of goods, the buyer of the good or service makes the payment to the contract account and the same smart contract supervises through the messaging programs that the merchandise has been transferred to the buyer. Finally, the smart contract is executed by crediting the funds from the deposit account to the seller.
In inheritances, through an automated process and connected to the civil registry, the contract enters into force after verifying the registration of the death and the planned assets are distributed autonomously among the heirs. For cases of donations, the age of majority of a child could be established as a condition of activation. In that case, the smart contract would be executed automatically to assign the donated goods.
They can also be useful when limiting public or private spending to specific cases, such as in a geographical area, on a specific date, etc. We would be facing a programmable money useful to be used in private companies, public institutions, and non-governmental organizations when it comes to limiting the problem of corruption.
How Does it Work?
The code that constitutes the content of the contract is stored in the blockchain, a virtual book that records all the transactions of a certain cryptocurrency. The code should be based on logical rules (if X passes, then Y) and conditions (which can interact with autonomous devices like IOT sensors). The result is an armored virtual agreement with all eventualities covered, so that if all parties deliver what was agreed, there will be no possibility of fraud.
Sometimes it is essential to go to external agents to verify compliance with a condition. These agents are called oracles. Oracles are computer tools that allow validating the conditions provided in smart contracts. They generally refer to external information to decide whether a clause of the contract has happened or not. In this way, once the oracle obtains the information and contrasts it, the contract is executed and the transaction occurs.
Despite all that has been said, although blockchain is still in an early stage of development, we can safely affirm that the potential it offers us will allow us to introduce changes in the way of “exchanging value” through digital channels. Thus, in the same way that the internet brought us the exchange of information in an agile and simple way, this technology will introduce a new way of exchanging value between businesses, institutions and individuals.
In addition, hand in hand with automation comes the concept of justice and transparency. Without a doubt, smart contracts will increase the speed of the execution of transactions, which will eventually translate into the possibility of closing a greater volume of agreements with less risk of compliance.
So, are contracts and data sent over the network of Ethereum really secured? The answer is YES! The blockchain system owned and provided by Ethereum ensures that every code that has been set is free from the intervention of any party without compromising the flexibility of transactions in it. Hopefully this article gave some light on how data in modern times is transferred securely.