Are Smart Contracts smart?

reverseacid (56)in #blockchain • 6 years ago (edited)

Turing completeness is the ability of any system to stimulate other Turing complete machines. Simply put, a stimulation, when configured with specific instructions, that could functions on its own without outside/external interference. Qixcoin was the first cryptocurrency, released in 2013, to feature in its source code a Turing complete mechanism for continuous embedding of verification, that could function without third-party arbitration.

It didn't take long for this innovation to pick up when Vitalik Buterin described a derivative of this mechanism that referred to as Smart Contracts, an update to the 1996 terminology coined by the visionary, Nick Szabo.

“a set of promises agreed to in a meeting of the minds [which] is the traditional way to formalize a relationship.”

- Nick Szabo

Smart Contracts

A Smart Contract is a computerized mechanism, containing clever code, that can be used to execute virtual obligations by establishing trust, validity, security, and automation. Smart contracts and their integration with distributed ledgers are currently the central forms of attraction within the Blockchain space. Smart contracts facilitate the automation of obligations that would traditionally require third-party arbitration to execute.

Removal of Arbitration

To give an idea about the importance given to Smart Contract implementation, let me put forward an example.

In the traditional capital market scenario, to procure Shares of a particular organization, an individual has to travel through multiple layers until the delivery is received. First comes the sub-broker through which the individual has registered under. The sub-broker then communicates the same to the broker above him, who then has to pass through the clearinghouse, the exchange under which the share is traded, and finally the organization that has issued the shares. It would take a minimum of 2 days and costs of 3-5 intermediaries that the individual should bare, to get her hands on the share certificate.

Visualizing the same on a Turing complete blockchain contract, such as the Ethereum blockchain, as soon as the individual enters the number of shares required on the company's forum, a smart contract will be executed that delivers the share to the individual instantly, which would also update the organization's ledger. As the organization has embedded a smart contract to execute the delivery, it doesn't have to manually provide authorization each time a request is made, the costs covered by the individual has absolutely dissolved, and delivery becomes instant.

Smart Contracts don't necessarily have to involve the facilitation of value transfer alone. Any information or digital data can be linked to a smart contract, which would allow instant transfer without any intermediary or third party continuously mediating the transfer.

Security of Smart Contracts with Blockchain

Technically, a smart contract can be designed and executed on a ‘blockchain-less’ platform for real-time use as no mandatory layer was specified in Nick Szabo’s first paper on the subject, but that would diminish the added capabilities that the integration of both platforms bring. Smart contracts and blockchains together form a virtual bond that discourages any malicious threats to the tamper the execution of the contract. A smart contract is written and executed without a blockchain layer lacks certain important characteristics that hinder the legitimacy of the contract. Without the use of a blockchain layer, the trust factor is removed, as one party cannot readily trust another party without pre-established rules for trust.

Blockchains are known to be immutable, trust-less, consensus-driven and accountable. A traditional digital contract lacks all the mentioned features, that make it susceptible to outside interference. Smart contracts that are integrated with the blockchain or any other similar Distributed Ledger Technology (DLT) that can achieve consensus, could be tremendously secure to perform.

Real-life use cases

1. Augur Prediction Platform

Augur is an Ethereum based dApp (decentralized/distributed application) that functions as a prediction platform based on the "wisdom of the crowd" principle. It solves all the traditional problems concerning prediction markets, such as censorship, mediation, arbitrator, etc. Any individual seeking for an answer can formulate a question that involves the network users betting on the outcome, in the hopes that as more and more people bet on the outcome, the likelihood of being right increases. Augur uses the Smart contracts feature of the Ethereum blockchain to payout the rewards as soon as the contract expires.

2. ICO platforms

An Initial Coin Offering (ICO) is the IPO equivalent of the traditional financial system. ICOs are in many ways, an update to the IPO system, as it brings in tremendously amount of automation and efficiency, that in turn elevates the process of Capital Accumulation. The ERC-20 feature of the Ethereum blockchain is currently the most used form of obtaining capital as it facilitates the instant cross transfer of digital assets. Ever since the ICO market kicked off, billions of dollars have been raised by prospective companies that are looking for growth opportunities as well as scammers looking to make fast money. It is still a growing field, but also a prospective one.

3. Escrow Management

To establish trust with unknown parties over long distances, banks, brokers, arbitrators, etc are used to ensure the fulfillment of the obligation and transfer of value. Huge intermediation costs have to be covered, which increase the end burden on the final consumer. To help with this process, of escrow management amount parties that do not know each other. All parties can at any time make use of the transparency and immutability feature of the Blockchain to get about the process without wasting resources on third parties.