Analysis of Smart Contracts

Ed. Note: This post by Mansi Meena is a part of the TLF Editorial Board Test 2018

Blockchain based smart contracts have the potential to interrupt business as well as financial technology in the same way as online commerce interfered with the offline one. Marc Anderson, co-writer of Mosaic and co-founder of Netscape says, “when we are sitting here in 20 years, we will be talking about blockchain technology the way we talk about the Internet today”.

Smart contract stands for legal contracts which are performed through any computer software. In this rapid-moving smart world, these smart contracts make life easier since they are automatic/self-executing. There is a good amount of market opportunity and participation of eminent investors in the near future because of its narrow, mechanical inputs and straightforward outcomes. The legal contracts are converted into computer codes, stored and replicated on the network and administered by a system that runs the blockchain. Blockchain is a mechanism that enables you to transfer data directly to any other party that is connected to the same network without the need for any mediatory institute.

Platforms for smart contracts can have public blockchain or private blockchain to a specific set of nodes. This platform records the complete history of currency transactions. Bitcoin is a platform for smart contracts and is the first cryptocurrency which has been created. It also forms the largest market capitalization. Ethereum comes after Bitcoin. Both rely upon a public blockchain, following a consensus algorithm. Consensus algorithm helps in arriving at an agreement on a single value/data which is distributed among systems. Thus, it is required to synchronize as well as create consistency within the database.

Any smart contract can itself act as a contractor. It is not required to have intimate access to the contracting institute’s systems. It is to be performed and coordinated through the interfaces. To enhance the performance and transparency of smart contracts, they should be implemented in more formal models whether they are mathematical, logical or simulation-based.

Let us look at how a transaction differs in case of a normal contract and a smart contract. Firstly, for a normal transmission you will have to fill in documents with assistance of a middleman but, while using the blockchain technology no intermediary is required and the administration is rather, more transparent because the blockchain system is a peer-to-peer network in which the moment any transaction takes place, the details and statistics about it spreads rapidly to the other nodes which are randomly connected to each other. This process is known as relaying’.

Secondly, the filing of documents needs to avoid errors which may arise due to manual filling of the forms. This whole task can be avoided because smart contracts are more accurate and not ambiguous like any other normal legal contract because for a particular input, only a particular output comes as a result. Although this tendency of the computer system avoids the possibility to interpret clauses from a contract.

Thirdly, while your money travels around the world there also lies a possibility that the documents get lost or misplaced. Such circumstances are always avoidable in digital contracts where every document has a backup and is thus, safe.

Fourthly, any valid change in one clause or point will lead to more paper-work and authorization which will result in more time consumption and delay of the transmission of money. In cases concerning smart contracts, this can be circumvented because any valid change in one clause or point will automatically be updated in the other documents as well and thus, interfering to cause any unauthorized alterations with the contract becomes nearly impossible.

Fifthly, the banking system is centralized and to a limit, controlled by the government. While digital legal contracts are not centralized and thus, no regulation for them exists from the side of the government. Since there is no regulation, the government also lacks the opportunity to tax them.

Blockchain based smart contracts are creating a massive trading environment in the digital space. They have transformed from a term that was used by Nick Szabo in 1997 to an integral part of transactions today that works on the blockchain mechanism. The consequence as to where digital contracts are headed is hard to know but definitely, an interesting issue to debate upon.

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