Smart contracts :
- Reduce transaction costs by eliminating the need for intermediaries
- Improve the security and privacy of the parties involved
- Help to enforce the terms of an agreement
Contracts set mutually agreeable rules, the terms of condition for assets, and performance incentives in the form of rewards and penalties.
Smart contract are software coded with the same logic as a contract. Once it is set in motion, nobody can revoke it, or overide it.
Nick Szabo is the founder of smart contracts. it is a bit like a vending machine, the buyer select the beverages, inserts the right amount of coins and then the machine delivers the beverage and the chain.
Benefits from smart contracts :
- Reducing mental transaction costs
- Increased predictability
- Broad security
Most contracts are built using Ethereum, a blockchain-based platform. Ethereum was first proposed by Russian-Canadian programmer Vitalik Buterin in 2013 and released in 2015. Each contract is executed using a Turing-complete Ethereum Virtual Machine. Yeah, we know that’s a mouth-full. This basically means that this program can simulate a computer. It doesn’t think per say, but it is expressive. It can “decide” things in an if/then fashion. This logic makes it perfect for smart contracts, which need to be able to function and execute commands with many variables.
For example, the ICO KICKICO lost $8 million after a smart contract breach in July. But the most notable hack occurred on the DAO (Decentralized Autonomous Organization) in June 2016, in which the hackers made off with $50 million. This led to a split, or hard fork, of Ethereum Classic (ETC) to Ethereum (ETH) in an attempt to make the platform more secure.
Smart contract Phases
Search -> Negotiation -> Performance -> Post-Performance
Search :
First era of internet was great for search, search engines, ads, maps, matching people etc. This radical gains in innovation became quite basic now. Search: During this phase, buyers and sellers find and assess each other. The most radical gains made possible by the preblockchain Internet came in this phase, deriving from the raw ability of the Internet to connect nearly everybody together and tools such as search engines for them to find each other. Search phase innovations that match buyers with sellers, vis-à-vis the pre-Internet era, have included very humble and boring but powerful capabilities that we now take for granted: text search to find products on sites such as Amazon and eBay, Google’s ability to match purchased ad keywords with text searches, and Lyft’s and Uber’s use of smartphone global positioning system (GPS) and maps to match riders and drivers. First era of internet was great for search, search engines, ads, maps, matching people etc. This radical gains in innovation became quite basic now.
Negotiation :
Negotiation: At the end of this phase, the terms of the contract have been agreed and committed to. Computer and the Internet have also made possible substantial innovations in the negotiation phase. These have included eBay’s collectibles auctions, Google’s keyword auctions, and various price-setting algorithms. The latter are especially valuable for situations that involve variable costs but require take it-or-leave-it prices (as is common in retail), such as Uber’s price-setting algorithm, which factors in distance, driving conditions, and other transportation data it gathers into its computers.
Performance :
Performance: At the end of this phase, the terms of the contract have been performed. This phase includes collateral management (the attachment, freeing, and/or seizing of collateral to incentivize performance). So far during the Internet and smartphone eras, comparatively few innovations have occurred in this phase. Regulation has stifled Innovation in payment systems. Automation of performance continues on its long road of progress since the early days of the industrial revolution, but the pace of this progress pales in comparison to the pace of innovation brought about by the Internet and smartphones in the search phase and, to some extent, in the negotiations and post-performance stages over the last few decades. Thanks to advancements in computers, sensors, and blockchain technology, verification of performance, especially in areas such as finance and logistics, has a far vaster potential now than it did a few decades ago, the potential of which we have so far barely scratched the surface.
Post-performance :
Post-performance incentivization: This phase includes not only contract law itself, but what I call the “micro-contract laws” of ratings systems and credit card chargebacks. Postperformance shaping of incentives can include reputation (especially via social network), the ability to chargeback (e.g., as bundled into typical credit card payments) or recourse to local legal systems (which is expensive, often prohibitively so, and so a major goal of smart contract design is to minimize dependence on legal incentives). Some postperformance phase activities—such as consumer ratings of businesses and credit ratings of consumers—can feed back into subsequent search and negotiation phases by informing future parties about (summaries of) the previous activities of their prospective counterparties. While the chargeback system is still widespread, ratings systems take advantage of the Internet. On the one hand, they shape incentives of the earlier performance phase; and on the other hand, they inform future counterparties during the search phase of the next deal cycle, further increasing the quality of the searchphase matchmaking.
The point of smart contracts is to reduce reliance on litigation.
Smart contracts running on blockchain could give tremendous improvements to the whole 4 phases described above.
Smart vs Traditional contracts
Jurisdictional silos, nationalistic. In old case law, lawyers can find many important conditions that computer programmers haven’t yet contemplated or – like the death of a user – aren’t easy to see on a computer. Traditional contract making : Wet code : Language that is interpreted by a human.
Smart contracts contain rules and conditions analyzed by software code. Performance is verified and exectued by impartial technology. Dry Code : software code that is interpreted by a computer.
Attack surface : The number of points in a software program where an attacker could break in. If the program is a smart contract, the asset could be crypto assets, identity, private data..
Which is more reliable, a traditional contract or a smart contract ?
They are pretty complimentary. Working together, wet code and dry code can secure the foundation for strong business relationships. Lawyer would complemented the job of machines. Digital evolution of deal making and business law. Lawyers and software engineers must break out of their silos, and work together. They can together run deal scenarios.
Smart contracts and Law
If you’re talking to a lawyer, the most accurate way to describe a smart contract is as a set of security protocols taking on the burden of lawsuit.
REPO : repocession, banks and finance hire repo man when somebody defaults on a loan and repo guy comes and takes your car for instance.
By reomoving the burden of lawsuit on the creditor, lenders will be able to give more easily the loans.
A smart contract generally makes no attempt to be legally binding. It’s called a smart contract because it mimics, or improves upon, the effects of a traditional legal contract. It provides inventives for performance – not by threatening litigation, but by using software to control money or other assets.
We may need to supplement our Dry code with Wet code.
How much of a traditional contract do we still need ? And what are the costs of enforcing it ?
On the good side it makes it more easy to enter a contractual agreement and we don’t need all the complex rules and documents. On the flip side it could penalize one party too harshly. In that case it would take the traditional way to solve the issue.
Both parties would be able to get out of an unwanted and unforseen solution and roll back.
Smart and traditional contracts should work in tandem.
There are some tools available to deal with breaches : Like for isntance Performance Verification Code, it detects a failure in execution, and will seize the on-chain collateral of whoever breached the contract as payment for damages.
The tricky part comes with jurisdictions. Smart contracts are global and persist on a globally distributed blockchain, they are specific to the blockchain.
What if all our computers could check our contracts to see if they are compliants. that’s what reg tech does. Smart contracts deals with assets, reg tech focuses on the application of Wet code, this makes them different in terms of technology and application.
Code is not law. Law is law. We are programming business logic into smart contracts.
Smart contracts application Areas
- Retail payments :
Smart money, smart payments. You give money to your kid, you want the money to be spent on tuition and books, he tries to buy a Mojito with it, smart money says nay nay.
- Worry-minimized commerce
We lose prospect through the deal making process. Worry free commerce is streamlining the process and making it easy and fast and standardized.
The forms are a big barrier, fear of complexity of lines. Reduce customers worries ! Reduce forms and over charge, drop off will decrease.
Second layer retail blockchain solution.
- Insurance
A parametric contract pays out based on measurable data, not on some estimate of the loss. It assess the actual loss of revenue. It uses an input oracle tested for yielding quality data.
Far more open to smart contract automation, fewer manual steps.
- Logistics
Optimize supply chain logistics from the machine making the part to the part themselves, tracked from their inception to their usage.
GPS, sensor, IoT, participants could track items everywhere, smart contracts could track performance as the assets move through time and space.
We could speed up the metabolism of supply chains. We could improve inventory management, trnsportation, distribution, accounting, payment processes, and more, across entire deal cycles.
With blockchain and smart contracts drivers would maybe be able to get ride of Uber ! and disrupt the disruptor !
- Algorithmic management
Algorithms decide when we should stop and when we should go. Where performance can be measured, computers can keep track of far more people than human bosses can – and with greater detail and perfect memory.
Nice analysis from Deloitte https://www2.deloitte.com/us/en/insights/focus/signals-for-strategists/using-blockchain-for-smart-contracts.html
Strategies and best practices for the organization
Examine your organization’s business processes.
Look for performances and conditions that are or might potentially be verified by sensors and computers such as payments and more sophisticated financial arrangements, logistical events, and tasks involving space and time, public arenas such as social networks with observable events, measures, statuses, and status changes. Look also for other potentially measurable conditions or tasks particular to your business.
Leverage your current systems for identifying your employees, users, customers, and other stakeholders.
Identity is local, insecure, and labor intensive. Blockchain and smart contracts technologies have not solved any of the most important weaknesses of identity systems. You and those you have reliably outsourced identity tasks to in the past are and will continue to be the experts on how to securely identify these people and the proper representatives of these organizations.
Make your business processes more globally scalable by reducing their dependence on legal identities.
Use fewer forms via more measurement. Depend less on local law enforcement and more on customized and global security agreed by you and your counterparties, as embodied as much as possible in trust-minimized, on-publicblockchain smart contracts.
Use hardware wallets to integrate smart contracts and on-chain assets into your internal controls.
You or your identity providers should develop business processes to map identities to the hardware wallets (private keys and corresponding blockchain addresses) they control. This function combines IT and identity information providers. Integrate hardware multisig controlling on-chain resources into your broader signature authority policies (finance/
accounting departments).
Prefer public blockchains to private blockchains for running your smart contracts across borders.
Public blockchains depend on computer science rather than identity and local law enforcement for security and reliability properties. Mature public blockchains are securely permissionless and seamlessly global, which makes them more secure and reliable over a wide variety of local, regional, and global conditions.
Increase your organization’s global reach by using smart contracts to lessen the dependence of your business processes on intermediaries, identity, and local laws. Make your business processes, both internal
and outward facing, less like a bureaucracy and more like a vending machine. Shrink forms and improve metrics and levers.
Design friendly smart contract user interfaces to minimize the worries of your customers, users, employees, and other stakeholders when they
deal with your organization. Reduced dependency on stakeholder-input information will reduce the tedium and the vulnerability to identity theft that organizations often inadvertently impose on their stakeholders. It will generally reduce your company’s legal risks and will increase your organization’s reputation as a friendlier, less worrisome entity to do business with.
Hire lawyers who know computer science and software engineers who know law, and ask them to collaborate on creating the secure underpinnings of your business relationships. Your lawyers and software engineers should come to know the strengths and weaknesses of each other’s approach, and your software engineers should obtain knowledge and inspiration from the long, highly evolved history of ontract and secure transactions law and practice.
Outsource to small and remote entities with whom you couldn’t do business before. Once you can measure the most important of certain employee tasks, the next step—the most valuable step, but the one traditional scientific management has failed to recognize and take—is
to restructure your contractual relationships. Employment relationships occur because contracts are too incomplete; they involve too many tasks that cannot be specified ahead of time, and so a relationship where a boss can determine on the fly what needs to be done and can instruct his
employee to do so substitutes for a contract where the task is specifiable and its performance verifiable.
Convert employment contracts to independent contractor or other outsourcing contracts. Once you can verify the performance of certain employee tasks, mostly by measurement than by subjective human judgment, you can make sufficiently complete contracts regarding those tasks so that you can outsource them.
