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SMART CONTRACTSOur definitive guide to smart contracts

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CONTENTS

SMART CONTRACTS EXPLAINED 3How does a smart contract work? 3What are the benefits of a smart contract? 3

SMART CONTRACTS AND ETHEREUM 4Is Ethereum a currency? 4How is Ethereum different from other blockchain networks? 4What are the benefits of a decentralised network? 4

THE USES OF SMART CONTRACTS 5Administration 5Healthcare 5Real estate markets 6

SMART CONTRACTS AROUND THE GLOBE 7Russia clamps down on worker’s rights violations 7The US takes a blockchain bite out of crime in the workplace 8

CONCLUSION 9

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In the 1990s, legal scholar and cryptographer Nick Szabo laid out the concept of smart contracts with the remarkably simple vending machine example – you input data, and the digital vending machine produces an item.

With a traditional vending machine, you put in money and you get a snack or a soft drink in return. With smart contracts, the basic concept is the same, but the possibilities are endless. They are programmable agreements that can take an input of value or data, and produce the outcome that obeys the terms of the contract both sides agreed upon.

Instead of going to a lawyer to mediate the purchase and payment of an asset or service, people can lay out the terms of their agreement in a smart contract without relying on a middleman.

How does a smart contract work? Let’s imagine you’re selling a house, and you’ve found a buyer. Both of you are technologically savvy and don’t want to go through costly middlemen, but you also want to make sure both parties respect the terms of the purchase.

You want to receive the money, and your seller wants you to deliver the property deed, so you turn to a smart contract platform. You lay out the terms of your accord: 50 Bitcoins by 1st June or the agreement is void and automatic delivery of the property deed upon payment. Before the agreed date, the seller sends you the agreed amount using the smart contract which then sends them the deed. With a smart contract, ownership is undisputed. Clearing and settlement also become automated.

Everything is stored in the distributed system and can be viewed by all parties whenever they want to access the information. Any transfers will be witnessed by network participants, so changes of fraud related activities are greatly reduced.

Smart contracts ultimately eliminate the need for any third parties to be involved in the transaction or to mediate the progress of the agreement. Trust between the parties can be maximised through smart contracts.

What are the benefits of a smart contract? Traditionally, any deal requiring a contract would involve some mix of bankers, lawyers and real estate agents but this won’t last much longer.

Ethereum is a smart contract platform on top of which hundreds of projects are being developed to eradicate unnecessary costs from these transactions. So far we’ve identified the following benefits.

�� Trust: your documents are encrypted in the ledger where they can’t be damaged or lost.

�� Autonomy: there is no need to rely on the traditional intermediaries.

�� Accuracy: human error is reduced to the point of insignificance, saving you time and money.

�� Backup: your records are backed up in every node of the network.

�� Speed: smart contracts run on code, so you don’t have to spend hours going through endless stacks of paperwork, and everything runs smoothly, efficiently and quickly.

SMART CONTRACTS EXPLAINEDA contract outlines the terms of an agreement between two parties. A smart contract does the same but is also able to enforce those terms with cryptographic code built into its platform.

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Is Ethereum a currency?Ethereum is the name of the public blockchain network. Miners work to earn Ether, which is the name of the crypto token that keeps the Ethereum network running. Around 5 Ether are created every 12 seconds, with 18 million mined per year.

While Bitcoin uses blockchain to track ownership of cryptocurrency (Bitcoins), Ethereum uses the network to run program codes for various online applications. As with other blockchain networks, this is done through smart contracts.

What are smart contracts?Ethereum’s smart contracts are programs that run exactly as coded by their creators. It is essentially an execution that can be set up ahead of time to trigger automatically once certain conditions are met.

While Bitcoin uses smart contracts to transfer currency from one user to another, this is all it is able to do. Ethereum’s platform allows developers to write their own scripts and create smart contracts for a variety of uses.

There is another type of token used on the Ethereum network, called Gas. This is used to ‘fuel’ smart contracts based on the required size, memory, or speed of the execution. It is often likened to filling up your car for the required journey.

How is Ethereum different from other blockchain networks?All blockchains have the ability to process code, but often within a set of limited operations. Ethereum allows developers to create their own processes, building applications that would otherwise have been impossible.

The Ethereum Virtual Machine (EVM) runs on the Ethereum network and allows anybody to run a program, making the process of building blockchain applications much simpler. Developers don’t need to build a new blockchain from scratch for each application, and they’re not tied down to a particular programming language.

What are the benefits of a decentralised network?By using a decentralised network, Ethereum has no central point of failure, protecting it against hacking and fraudulent activity. Cryptography provides an additional level of security to smart contracts, so applications on the Ethereum network are very safe.

A decentralised application, also known as a Dapp, is not controlled by any single entity or individual. It is simply a piece of code that runs on a blockchain network and serves a particular purpose. Ethereum can also be used to create a Decentralised Autonomous Organisation (DAO). This is a fully automated organisation that has no leader or owner and instead runs on programming code.

Agreements could be made and registered on the blockchain through smart contracts.

By using a collection of smart contracts, the code replaces the structure of a traditional organisation without the need for personnel to control it. Anyone who purchases tokens becomes a part-owner of a DAO, although these tokens provide voting rights rather than acting as shares.

SMART CONTRACTS AND ETHEREUMSmart contacts are a key feature of Ethereum; a direct competitor of Bitcoin. Ethereum provides developers with the tools to build their own decentralised applications, allowing a huge range of possibilities.

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Below, we take a look at just a few industries that could benefit from smart contracts.

AdministrationBusinesses are often encumbered by slow processes where approval from several departments is required before projects can go ahead. These delays result in real costs that have a negative on the company’s bottom line. They can employ the accuracy, speed and security of blockchain technology to streamline their processes and get rid of inefficiencies in their organisation.

Smart contracts would also prevent the wrong actions or unauthorised decisions being taken. Approval processes would be far more stringent, with all parties having complete visibility of what’s happened, when it’s happened, and who has ownership of the output.

THE USES OF SMART CONTRACTSA significant part of the exciting applications of blockchain technology depends on smart contracts. They can replace intermediaries and clunky business processes in many industries, which will ultimately save a lot of people money and time.

HealthcareCompanies in this field rely on databases of patient information which are too restrictive to allow the sharing of potentially life-saving insights across the globe.

If health records were stored in a blockchain where an individual’s private key safeguarded their anonymity, that information would be available to hospitals and research institutions everywhere. With sufficient adoption, that same individual could walk into any hospital in the world for treatment, and as they produced their private key, the hospital would have access to their information in a heartbeat.

Another benefit of bringing the blockchain revolution to the medical industry is that doctors and patients alike can facilitate peer-to-peer appointments. Patients could ask for an appointment directly from their doctor.

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Millions of pounds are wasted every year because of missed medical appointments. If doctors are able to schedule appointments ad hoc, the number of missed appointments would fall as they could fill gaps in their schedule instantaneously.

Real estate markets A smart contract eliminates the need for paperwork and the intermediaries involved, such as notaries and brokers. Commercial real estate players could then cut down costs and increase the efficiency of each deal. Real estate transactions are known to be slow and definitely not ‘real time’. This is where smart contracts come in to speed up the process. They may not be able to bypass local governments, but they have the technology to transform the property market to make it more efficient. They can speed up transactions, verification processes, and the process of home ownership.

Using blockchain smart contracts reduces costs significantly. They cut out the need for middlemen, meaning there will be no need for brokers, banks, or lawyers. This saves a considerable amount of money and cuts out the need to pay escrow fees.

Security is another large benefit smart contracts and blockchain bring to the property market. Rental scams, forged documents, or false listings are all impossible when documents and proof of digital ownership exist on the blockchain through a smart contract. All of these records are immutable and transparent, meaning no one can alter them. Every transaction of a property can be seen by everyone on the network.

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Russia clamps down on worker’s rights violationsThe Pension Fund of the Russian Federation (PFR) implemented blockchain technology to keep track of information related to contracts and other labour relations between employers and employees.

Smart contracts between employees and employersThe government implemented Ethereum-based smart contracts to be used as the legally-binding document establishing the labour relationship between employers and employees.

Russian officials told Izvestiya they believe the new system provides workers with protection from “negligent employers who violate current legislation when concluding contracts”.

“The introduction of smart contracts into labour relations will allow in the future to refuse compulsory conclusion

of them in paper form, but to have information about them at any time, as it happens today with the right to real estate,” the PFR – Russia’s most extensive social service – says.

Employee complaints More than 465,000 Russian citizens lodged complaints in 2017 claiming their employers had violated their labour rights. The government responded to those complaints by slapping fines on business totalling over $293 million.

Alexander Shcherbakov, Professor of the Department of Labor and Social Policy of the Institute for Public Administration and Management of the Russian Academy of Science and Technology, says labour violations in small and medium-sized businesses are widespread. He says blockchain technology will help reduce violations and aid in monitoring contractual compliance by employers.

SMART CONTRACTS AROUND THE GLOBEIt’s not just different industries that apply smart contract technology in a variety of ways. The responses of countries around the globe are also important to note. We take a look at a few examples below.

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The US takes a blockchain bite out of crime in the workplace Crimes in workplaces across the United States cost business circa $50 billion annually, which is why US startup I’ve Been Vetted (IBV) is using blockchain to help reduce the risks.

IBV uses blockchain technology developed by Swiss startup KryptoPal to create its solution aimed at preventing businesses from negligent hiring and reduce workplace crimes. The platform uses machine learning to predict and prevent these crimes.

“ It’s common knowledge among the HR industry that pre-employment background checks are simply insufficient as standalone tools for vetting,” says IBV Founder and CEO Jo Lynn Clemens.

“We’ve decided to work with KryptoPal to build a platform that will utilise smart contract technology to enable the transfer of the employer’s risk profile to their insurer and the transfer of a worker’s compliance profile to the next employer.”

Clemens explains that “by combining blockchain technology with our prevention and mitigation methods, we hope to reduce the number of harmful incidents against any consumer, in any industry”.

IBV’s solution allows businesses to continue monitoring its employees after being hired, re-evaluating them twice a year and estimating a risk score.

By putting employee scores on the immutable blockchain through smart contracts, future employers and insurers can access this information to evaluate a potential employee’s risk profile.

“We’re excited to launch this blockchain-based platform which will help form a relationship between businesses and employees that is built on trust and transparency,” says KryptoPal CEO and Founder Venkat Nallapati.

“Employers can be assured that they are hiring the best and most trustworthy people for the job by checking a candidate’s smart contract.”

The blockchain solution, based on smart contracts technology, also benefits the employee as they will be able to prove their professional merit and compliance history throughout their careers.

“Using KryptoPal’s developed software, all past and ongoing employment history documented by IBV can now be securely stored and shared using smart contracts,” added Nallapati.

“ This sensitive data is immutable and verifiable, and can only be accessed by IBV, applicants and the hiring business.”

Employees moving on to a different job will be allowed to export their compliance history to expedite the hiring process and enhance their application.

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The applications of smart contracts will only continue to grow as developers become more skilled in blockchain technology. To keep up-to-date with the latest developments and applications across the globe, make sure you follow Coin Rivet.

CONCLUSIONSmart contracts streamline business processes, transform the traditional way of conducting contracts, and help to lay the foundations for more trusting relationships.

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