While many people look at digital currencies merely as investment opportunities due to the skyrocketing value of Bitcoin, Ethereum, Litecoin, and other altcoins, some experts believe that the real value of cryptocurrencies is the blockchain technology, which has the potential to change the way we do business, particularly through smart contracts. And, contrary to popular belief, Ethereum is not the only game in town.
The expansion of fracking and shale oil production have been game changers for America. Although there is much debate regarding this technology’s impact on the environment, from its possible effects on groundwater to causing earthquakes, there is no denying its potential to make the U.S. energy-independent by 2020. A direct result may be lower gas prices for everyone in the U.S., higher GDP and more economic freedom for people as a result. Blockchain technology could have an equally large effect on society at large, not just because of its obvious value in dollars, but because of its ability to transform the way we do business overall.
The Blockchain Technology
The blockchain is a decentralized ledger that is designed to execute, validate, and record transactions without any need for a middleman. Blockchain-based transactions are faster, more secure, and require fewer resources than traditional transactions. This is the reason why many industries, particularly banking, are interested in adopting the technology into their existing systems.
The Birth of Smart Contracts
One of the most innovative applications of the blockchain technology today is the smart contract – a concept popularized by Ethereum. These are self-executing contracts that can validate the transaction between two parties and enforce the appropriate terms and conditions automatically, without the need for a central authority.
The idea of a self-executing contract based on the blockchain technology was first proposed by the cryptographer, Nick Szabo in 1996. The idea behind smart contracts was to create a system which enables secure transactions between parties while taking up lesser time and fewer resources than traditional transactions.
The Arrival of Ethereum
Ethereum’s debut as a cryptocurrency popularized the concept of smart contracts to a great extent. Ethereum is a blockchain-based platform, with smart contract functionality at its core. Ethereum enables contracts to be converted into code, which can execute and validate a transaction based on a set of rules. If the terms and conditions are met, the transaction will be executed. Otherwise, the transaction will not occur.
The whole process is automatic – without the need for any supervising authority to verify authenticity, or to enforce the terms and conditions of the agreement. This path-breaking technology has a vast range of applications and could change the very nature of business transactions.
There are many advantages to smart contracts over traditional methods of enforcement, in terms of costs, overhead and eliminating subjectivity. While Ethereum is in the limelight, the use of smart contracts is expanding further into Litecoin, Bitcoin, and several other altcoins. Transaction speed will be a determining factor in which platform becomes the standard, and each has its advantages and disadvantages. Keep reading for more depth on coins and technology to keep your eye on, as well as links to a few valuable resources.
The Advantages of Smart Contracts
To understand the benefits of smart contracts, it is important to know how regular contracts work and why a technological upgrade in the form of smart contracts was long overdue.
A traditional contract between two parties generally requires a third party, who plays the role of the arbitrator and enforces the terms and conditions in a fair and objective manner. Without the third party, the transaction between the parties cannot be validated.
The presence of a third party means three things. Firstly, the transaction costs go up, as you need to pay the third party. Secondly, the transactions take longer as they need to be validated by the third party. Thirdly, the presence of a third party increases the risk of human error.
With smart contracts, all these problems can be completely eliminated. Let us now take a look at how it can be done.
Smart Contracts – The Options Available
Ethereum – It is currently the preferred platform for smart contracts, and much faster than Bitcoin, with an average transaction time of 14 seconds.
MAST (Merkelized Abstract Syntax Trees) – There’s a great description of this new technological upgrade to Litecoin and Bitcoin in an open call for Liteoin Github contributors on Medium, by the Litecoin School of Crypto. Bitcoin is generally not the preferred smart contract platform for many, because the transactions are slow and expensive. MAST was developed specifically to address the issue of slow transactions. It reduces the size of smart contracts so that they take up less space on the blockchain. Moreover, it reveals contracts only after they are completed, which offers more privacy for all parties involved.
Litecoin – With an average transaction time of 2.5 minutes, Litecoin is much faster than Bitcoin. It’s no wonder that LTC surged in value recently. The recent MAST upgrade has shortened the transaction time further and has made Litecoin a viable alternative to Bitcoin and Ethereum, both of which are becoming slow and bulky due to increased user activity, not to mention the expensive network fees involved with trading Bitcoin. Bitcoin’s issues are being addressed with the recent fork into Bitcoin Cash (BCH), and Ethereum’s issues may be addressed when it switches from a POW (Proof of Work) to a POC (Proof of Concept) model. Another advantage of Litecoin is the Atomic Swaps technology, which allows owners of Bitcoin, Litecoin, Decred, and Vertcoin to trade one coin for another without requiring an exchange.
Monero – It has an average transaction time of two minutes. It’s also a “privacy coin” and offers anonymity features for people who do not want to reveal their identities.
Ripple – It is by far the fastest platform – with an average transaction time of four seconds. It is precisely this reason that a number of financial institutions are eager to adopt Ripple into their existing system.
Applications of Smart Contracts
The concept of smart contracts has piqued the interest of many because it has a number of applications in many industries. Let us take a look at some of them now.
One of the biggest complaints against the insurance industry is that the claims process can take weeks or even months to get settled. The settlement process is very slow because it is largely manual and requires a high degree of human intervention. Smart contracts can solve this problem by automating the process through logic and code.
An insurance policy can be converted into a smart contract by clearly defining the input conditions. Once the conditions are met – in case of a natural disaster, a death, or an illness – the claims process would be initiated automatically and the payment would be transferred to the recipient’s account, without delay.
Imagine never having to deal with stacks of paperwork ever again when it comes to your home or other property that’s secured by a bank loan. Smart contracts can automatically process mortgage payments, while enforcing the terms of the contract. When the principal and interest are paid in full, a smart contract can also remove the lien against the property, and transfer ownership from one party to the other. With a distributed ledger, there are no lost checks or missing paperwork. The entire payment history resides on the blockchain and can provide undisputable transparency.
Intellectual Property Rights
Smart contracts can connect content creators directly to consumers without the need for a publisher as a middle-man. For instance, a writer or singer could upload their content into the blockchain network with metadata that contains the details of ownership rights. They can craft a smart contract which specifies the conditions for downloading the file. Once a user obtains the file, the payment is automatically transferred to the IP owner’s account.
One of the biggest advantages of cryptocurrencies is that they support micropayments. For example, a restaurant or nightclub could elect to pay a few cents each time they play a digital song. Not only would this be challenging to enforce through traditional methods, but it is also cost prohibitive. Compare being able to charge 5 cents each time a song is played, automatically, to figuring out a solution where payments are made by credit card or Paypal where standard fees are typically 30 cents per transaction plus 2.9% if the total charged. Even Steven Jobs would be impressed. One can only imagine what Jobs would do with a payment model like smart contracts for iTunes if he were still around.
Some companies are already in the process of creating a distributed online music platform that employs the blockchain technology to connect the artist and consumer directly. It will enable developing artists to flourish on their own and diminish the role and clout of large recording companies.
Cargo shipping usually involves a large number of intermediaries to handle paperwork and payments. With smart contracts, most of the paperwork and the payment processing could be automated, resulting in huge savings both in terms of time and money.
Smart contracts can connect the buyer and the seller directly without the need for advertising agencies and real estate agents.
A group of pharmaceutical companies are currently working on a blockchain based system to identify and keep track of the distribution of prescription drugs. This can be used to track theft and other factors.
Possible Downsides of Smart Contracts
Clearly, smart contracts have a number of advantages over traditional contracts and have applications in a variety of different verticals. It does not, however, mean that the technology is flawless. There are certain issues that need to be addressed before the technology could be mainstreamed.
- Smart contracts are executed in a literal manner – there is nobody to interpret the terms according to the intent of the contract. While this can be a good thing, it means that the slightest mistake or oversight in formulating the terms of the contract could have undesirable consequences. Moreover, the codes for the contracts are written by programmers and there is always a possibility of human error, as well as a non-legal interpretation of the terms.
- Smart contracts are converted into code, with which comes the risk of bugs. The presence of bugs could hinder the execution process and result in unexpected consequences.
- Some people may consider it a negative that there currently is no legal framework available for regulating smart contracts, though the flipside is that they enable two parties to form an agreement that’s enforced by design, rather than requiring the force of government to get involved.
Experts are working on solutions to these challenges and to make smart contracts safer and easier to execute. Smart contract audits are considered an effective way to identify and rectify mistakes in the code. An experienced programmer could be asked to test the code to make sure there are no bugs or vulnerabilities before it is added to the network. In addition, a smart contract developer could bring an attorney into the process to identify possible issues with the interpretation of its terms. This may in fact open a new specialization for lawyers in the near future.
The terms of a contract need to be spelled out in a very precise manner, in code, without any room for ambiguity. People can use their reasoning abilities to understand the terms of a contract in the right context, because it’s logic-driven.
The Future of Smart Contracts
The concept of a smart contract is still fairly new. As the possibility of applying the technology in different industries increases, people will find a way to modify the technology to their specific needs. We’ll see widespread use everywhere from content licensing to sports betting, to the medical industry and beyond. When that happens, as with smart phones and social media, most of us will wonder how we survived without them.
Dennis Consorte has an appetite for news and information about cryptocurrencies, blockchain, IoT, fintech, adtech, martech and other technologies. He also has over 20 years’ experience in digital marketing and content strategy.
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