WHAT ARE SMART CONTRACTS? - Buy Bitcoins News profitable bitcoin Mining

crypt3

  • WHAT ARE SMART CONTRACTS?



    With more and more frequency we hear this concept: smart contracts . The simplest definition in this respect is that they are contracts that have the ability to be fulfilled automatically once the parties have agreed terms. But surely you have in mind the classic signed paper, so how is it possible that a contract can be enforced itself? Well, the truth is that smart contracts are a bit different from paper contracts.

    Both are agreements in which two or more involved commit themselves to fulfill a series of conditions, and their fundamental elements are the same: voluntary consent of all parties, the object of the contract (good or service), and a just cause, True and lawful. 

    However, both differ in three factors : the mode of writing, its legal implication and the mode of fulfillment.

    Paper contracts are written in natural language. That is, it is enough to write the conditions and terms in the language involved. If all parties agree, they sign to secure their promise, which leads to their legal involvement: a paper contract has costs. Depending on the jurisdiction where those involved, or under which they want to carry out the contract, they are likely to meet certain requirements, such as a notary. On the other hand, its mode of compliance is subject to the interpretation of the parts, which may favor one more than the other.
    The intelligent contracts , however, are computer programs . They are not written in natural language, but in virtual code. They are a type of software that is programmed, like any other software, to carry out a task or series of tasks determined according to the instructions previously introduced. Its compliance, therefore, is not subject to the interpretation of any of the parties: if event A happens, then consequence B will start automatically. Its legal implication has fallen - like all the technology related to Bitcoin - in a gray zone. No trusted intermediary (such as a notary) is required, as this paper is adopted by the computer code, which will ensure, without doubt, compliance with the conditions. 


    SMART CONTRACTS, IOT AND BLOCKCHAIN

     

    Here we can pause for a moment. Smart contracts seem to be a great concept, but how can a software connect to real assets? Let's say I want to buy a house and for that I need a contract. A notary can assure me that the seller will give me the property title once I pay the agreed fee, but how can I ensure that a software? In addition, money management has strong regulations. Do not these similarly affect smart contracts? And what about computer manipulation? Can not any of the parties manipulate to their benefit the computer where the contract was written or even the code of their software?
    All these problems were encountered by its original creator, Nick Zsabo (suspected, of course, of being Satoshi Nakamoto), when he first proposed the idea in the early 1990s. Technology at that time could not solve these drawbacks , And for that reason the idea was waiting for a better future.

    Fortunately, that better future, with the consequent technology that allows smart contracts to be applied, is already reaching all over the world: it is blockchain or distributed accounting and Internet of Things (IoT).

    Let's review the problems to be solved in the last century: computer manipulation, regulatory limitations for money management and the connection of software with real assets. Well, only the blockchain can almost completely solve these three problems.
    Being an encrypted and immutable database, maintained not only by a computer but by hundreds or even thousands, where anything can be recorded - even a computer program such as smart contracts - computer manipulation is discarded. As for the management of money, it must be said that the blockchain has allowed the emergence of the criptomonedas, a type of digital asset and decentralized, that is to say, not linked to any government or entity, available to anyone in any part of the world without regulations Territories; Which greatly facilitates the transfer of money. Finally is the connection with real assets. And while in the blockchain can be registered documents, bonds, shares, applications and any other type of digital asset, We still have the problem of connection to the house (for example). How will the smart contract work for the purchase of a home?
    This is where the Internet of Things comes in. According to a report by IBM , by 2020 worldwide will have more than 34 trillion Internet - connected devices, and at least two - thirds of them are not computers or mobile phones. 

    They will be everyday objects : from a washing machine and a bulb to a stove or a lock. And therefore, when connected to the Internet, they can be controlled in a digital way.

    FUNCTIONING

    Let's return to the example of buying the house. Let's say Maria wants to buy Peter's house on credit, paying a certain amount of monthly installments. Then Pedro and she use some platform of intelligent contracts (like Ethereum or SmartContract) to schedule the contract with the established terms. 

    Among them, that Mary will pay X amount before a certain date every month, or else the door lock of the house will be blocked, and that Peter will irrevocably cede the title deed registered in the block chain to Mary when the amount Agreed upon. Then the intelligent contract will act, without intermediaries , and will carry out exactly those instructions, to the letter, without Maria or Pedro can intervene.

    Now, let's take another example where more external information is required, like a sports bet. Let's say Maria wants to bet X bitcoin on team A, and Pedro wants to bet the same amount on team B. They deposit funds in a smart contract to make sure that, after the result, the winner actually stays with them. But who tells the contract which team won?
    The answer is the oracle . These are computer tools that allow you to update the status of smart contracts with information from abroad, such as the prices of currencies, the stock price or if you won team A or B. Although, of course, the source of that oracle Remains a third party, an intermediary outside the blockchain and outside the contract and therefore subject to trust. This is a problem to be solved, for precisely what we want to eliminate with the smarts contracts and the blockchain is the need for trust. However, there are already options for this: some projects, such as Oraclize, compare the information from all the sources that are indicated to determine its validity.

    Let us take one last example. Let us imagine that Peter and Mary want to save by means of monthly payments a certain quantity in a determined period and to spend it in a common product or service. The contract will then block those funds until that amount is reached, but at that moment, what ensures that Maria or Pedro does not withdraw it on their own? This time the answer is not the oracle, but the multifirm function . This allows setting the contract so that all parties have the duty to approve a transaction. In this way, only one of them can not have the funds.

    In conclusion, an intelligent contract works: the parties configure the terms of the contract, it is stored in a specific direction of the blockchain, the event contemplated in it occurs (a transaction or information received) and the previously established consequence is carried finished. BBVA explains it with a diagram:

    smart contract

    Image Source: BBVA



    ADVANTAGES AND DISADVANTAGES of Smart Contracts

    The advantages are obvious, and can be reduced to three words: autonomy, security and confidence. By using smart contracts, it is no longer necessary to resort to a third party - such as a lawyer or a notary - who, in addition to being prone to errors, causes significant expenses. The blockchain is able to safeguard the information in an encrypted network that can be consulted from anywhere in the world, so that speed and security are visible.
    On the other hand, and like everything in reality, these types of programs also have certain disadvantages, or rather obstacles to overcome. The first consists of the technologies that are worth: IoT and blockchain. While the IoT can allow a true link with real assets, the truth is that it still has a long way in security. IoT devices are easily hackable , something big companies have already joined together to solve. The blockchain, on the other hand, is more than safe, but it is immutable. Once the terms are agreed, they can not be changed later, something certainly disadvantageous for a contract: Maria can have some inconvenience for a month, and then she would stay out of the house without Pedro being able to avoid it. For this, solutions are also being developed: Accenture,
    Intelligent contract scheduling experts also are not plentiful enough to promote mass adoption, and it is even worth mentioning that sometimes they are wrong. These programs are tricky, and if there is just one bug in your programming (bug) it is possible for a third party with bad intentions to steal the funds stored in the contract. It already happened with DAO last year , but since this is a new technology, such incidents may be common at first.
    The legal issue can be a barrier or an open door. We will talk more about it later.

    APPLICATIONS

     

    What are the applications of a contract? Yes, all those. Also, let's look at some of the common features in smart contracts:
    - Automation of payments: can be programmed to ensure that the required quantity will arrive in the specified time to the indicated people or organizations. Inheritances could be automated in the future, loans could be secured and, on the other hand, the humanitarian group Start Network plans to use this feature to distribute its funds to those most in need.

    - Registration and change of ownership: you can register in the blockchain the documents necessary to establish a property from the beginning, and change ownership through smart contracts. Sweden is already testing its own platform to do so, while in the Netherlands the ABN Amro bank is designing a real estate systembased on this technology.

    - Energy Transactions: it has been considered to create a digital ecosystem for the exchange of energy. In this way, electricity or fuel sources would be connected to intelligent contracts between only individuals or with organizations involved, which in turn could customize the consumption of each customer. Wien Energie GmbH , the largest energy company in Germany, and Endesa , the largest in Spain, are proving this utility. On the other hand, Innogy SE - subsidiary of the German energy giant RWE - is already using smart contracts to allow the recharge of electric cars.
    - Intellectual property (IP) : when the rights of a product or services are shared the distribution of income can be difficult. Smart contracts can not only facilitate these processes, but automate them. In the UK, for example, a new type of smart contract has been developed especially for IP in the video game industry.

    - Insurance : In this sector would require common oracles of trust between the insurer and the user, but the process of payments to incidents could be automated and therefore get rid of paperwork and valuable time. Law firm Hogan Lovells has alreadytested for earthquake insurance.

    - Bets: no reliable third party would be required for any kind of bets. Two or more parties can use a smart contract to ensure that the conditions will be met.

    - Automatic purchases: a smart contract could be configured for the purchase of shares, cryptomonedas or any other product at a fixed price during a certain period of time.

    - Voting: the results of any survey, from a trivial subject to governmental elections, can be recorded and verified in a safe and accurate manner, and even establish an immediate consequence for those votes depending on the results.

    - Smart Property: As Szabo described from the beginning, it is possible to embed a smart contract in any object that is controlled by digital means. This is where 'smart property' is born, which can be assimilated to IoT objects - connected to the network. These can range from homes to cars. Thus, for example, the income of these properties could be automated.

    HOW TO MAKE A SMART CONTRACT?

     

    We have already commented that smart contracts are not written in natural language but in computer code, so the big question is: do you have to know how to program to create a smart contract? Well, now that this technology is taking its first steps, it is preferable, but not mandatory.
    In A Lawyer's Introduction to Smart Contracts two layers are described for smart contracts: the Smart Contracts Platform (SCP), which is the infrastructure that allows them to be created and operated on a blockchain, and the Smart Contracts Management System (SCMS) ), A protocol that would be added to that infrastructure to make it much easier for a user without programming knowledge to manage these contracts. In other words, the friendly graphical interface.

    We currently have several SCPs, other than Ethereum, which is probably the most popular. Without leaving the blockcock of Bitcoin, in fact, Rootstock and Counterparty are available . Outside of it, Codius and Chain's latest Ivy Playground are also options. However, to 'write' smart contracts about them directly requires programming knowledge.

    Platforms available with SCMS can be likened to 'Smart Contracts as a Service', which implies that, for the moment, they probably come from startups blockchain and the service is awarded in exchange for a cost. One of them is SmartContract, where you can create different types of contracts on Bitcoin or Ethereum without programming.

    ARE THEY LEGAL?

     

    It depends on the jurisdiction, and even the interpretation of the same contract on the jurisdiction to which it should be subject, since these are written on the blockchain, which can be consulted anywhere in the world. At the moment, they are a rather gray area. In A Lawyer's Introduction to Smart Contracts, which dates back to 2014, a conclusion is reached that to date has not changed much in most countries:

    The current legislative position, at the time of this writing, is very simple: it has never been discussed in the legislatures. The reason is that, of course, this discussion is preventative, since SCs are not publicly available as a product or service, although there is a beta software available to demonstrate the technological concept. It may be intrinsically illegal, just as the cryptones are illegal because of inflexible laws on legal tender; Some jurisdictions may have inherent laws that prohibit similarly to SCs.
    Samuel Bourque and Sara Fung Ling Tsui
    A Lawyer's Introduction to Smart Contracts
    The caveat is that, of course, the discussion is nowhere near preventive. Ethereum arrived in 2015, and with it a veritable avalanche of smart contracts. Nor can we say that they are illegal or prohibited; In fact, this treatment has been much more focused on cryptones.
    It is true that there are still many legal issues to be resolved with respect to smart contracts, such as the right to be forgotten . But the world, and its legislations, is already opening up to them: for example, in Arizona (United States) it has been determined that they have the same legal status as traditional contracts, and according to the consultant Capgemini these instruments will be imposed in The industry in just three years thanks to the efficiency and savings they are able to provide.