Smart Contracts and Dapps

One aspect of blockchain technology which not only drastically increases a number of blockchain use cases, but also their ability to fundamentally disrupt a variety of industries and non-profit causes is the invention of smart contracts. Smart contracts are contracts written in code and embedded onto a particular blockchain. The code contains all the rules, conditions, expiry dates and all other relevant information needed for its fulfilment, which execute automatically once the terms are met.

The notion of smart contracts was first conceptualized in the early 1990s by Nick Szabo, the concept was first compared to a digital vending machine: you select an item, input the required amount of cash and receive the desired goods when the payment is registered.

As opposed to traditional contracts, a smart contract example would include conditions pre-written in a programmer language which is very different to ones based on human language, which can be very subjective and open to judicial interpretation. Instead, a smart contract behaves in predefined ways and is automated in the pattern of “if this happens, then do that”, which is a more objective, data-driven way to ensure contract conditions are met.

What makes smart contracts so key in expanding blockchain use cases is that the fact that the conditions for completion and requirements of all parties are entirely quantifable. This means that a certain numerical action needs to take place in order for the smart contract to be activated, refunded, or terminated.

Blockchain app developers on the Lisk network will be able to incorporate smart contracts into their sidechains.

A smart contract is agreed upon and stored on a decentralized, encrypted ledger. This elevates its blockchain uses for a variety of reasons. First of all, the decentralization of a blockchain hosting the ledger means that it is not processed by and thus entrusted in a central entity who might have self-interest in manipulating the data. Similarly so, the encrypted nature of blockchain technology means that any smart contract example and its history is permanently embedded into blockchain and any outside manipulation will be noticed and corrected by other nodes on the network. This helps all parties benefit from the trustless nature of the infrastructure. Any tampering would require huge amounts of computing power and would not be financially or logistically viable.

Lastly, the failure of one particular smart contract does not necessarily spell doom for the overall database, or ethical integrity of blockchain technology itself, as all smart contracts are verifiable on a case-by-case basis. Thus what we end up with is creating what logically behaves as a single, large and secure computer system, but in fact, it comes without the risks, costs and trust-related issues of a traditional, centralized model.

The automated, verifiable and trustless nature of smart contracts has added a new aspect of tangible blockchain uses in the real world, one that allows it to pose a serious challenge to the majority of centralized industries. Most traditional businesses rely on legal infrastructure and agreements in order to conduct business with third parties. This requires a variety of middlemen, as well as incredibly big budgets dedicated to documentation processing and contract enforcement. By opting for a blockchain-based smart contract system, most businesses can reduce the risk of fraud and the costs of middlemen, whilst avoiding having to hand all data over to another centralized entity. In essence, they allow any business agreement to be automatically executed or enforced.

Most importantly however, smart contracts in blockchain use cases can help to save the most important resource of all – time. Businesses waste a great deal of time handling paperwork, enforcing contracts and interacting with middlemen. Smart contracts help to save companies countless man hours that could potentially be spent elsewhere.

Smart Contract Use Cases
While the technological basis for these inventions sounds theoretically appealing, it is also important to note that smart contracts are being used in everyday situations. To give a specific smart contract example, in 2016 financial company Markeit utilised smart contract technology to create and manage a fully functioning network of credit default swaps trading. There is also a significant push and legal debate regarding the validity of smart contracts in selected legal proceedings. It is likely that in the future lawyers will switch from writing traditional contracts to a sort of a hybrid, where contracts are written in code, verified in blockchain, but also backed by a traditionally articulated version.

Blockchain Applications

It is also essential to note what is a smart contract in relation to the end user and how it can affect a variety of outward facing, business-to-customer industries. Smart contracts can signify particular business processes and can be coupled together on a blockchain in order to perform more sophisticated functions. Another exciting smart contract example is the emergence of blockchain applications, sometimes referred to as ‘dapps’. Within the context of blockchain, blockchain applications can be understood as blockchain-based user-facing interfaces which connect the end user to the technology through a combination of underlying smart contracts.

To best compare these applications to similar inventions in the traditional internet sphere, one should think of the relationship between blockchain applications, smart contracts and the blockchain in the same way traditional web applications use HTML, CSS and JavaScript to render a particular page. They do so by using particular platform application programming interface, or an API to access its database. Similarly, dapps use smart contracts in order to connect to the particular blockchain upon which they are based. The introduction of this new generation of apps heralds a new era of blockchain usage, by bringing the efficiency, flexibility and security of blockchain-based smart contracts to the end user through a much-needed option of front-end interface.

As such, smart contracts help all participants exchange capital, property, or anything else with value in a totally verifiable, conflict-free method, while cutting out any central entity, or any unnecessary third party.

What’s next?

Decentralized Government

In this chapter, we will explore how blockchain technology is being used to permeate and improve government activity around the world.

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