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WHAT ARE SMART CONTRACTS?

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Imagine you are trying to buy a house. You have all the assets needed for the transaction, the seller has all the proper documents. But you need a third party to clear the transaction and make the deal. A Bank or a broker who will check and enforce all the terms of the contract. This system has been in place for decades, and it isn’t without its flaws. It’s time-consuming and prone to human error. It’s hard to believe that in the midst of decentralized revolution we still have to rely on third-party confirmations. However, the solution is there since 1994 – Smart Contracts.

With the rapid growth of blockchain technologies, we observe more and more new solutions to common problems. Satoshi Nakamoto and his manifesto started the revolution. The idea of Bitcoin has opened up new possibilities. Bitcoin was supposed to be an answer to the decaying financial system at the time, but it started something new. Blockchain, the technology that allows Bitcoin to be a digital currency without ‘double-spending’. Has become a new tool for developers and entrepreneurs around the world.

How did it start?

In 1994, Nick Szabo – Hungarian entrepreneur and developer had coined a term ‘Smart Contract. It describes a simple computer protocol that would automatically execute and enforce the terms of any contract. The name itself is a little misleading, Smart Contracts are neither Smart nor Contracts in the traditional sense. There are no sophisticated learning machines behind it. What’s more. Smart contracts work best in a constricted environment where the code is less prone to bugs or unexpected outcomes. There is no legal precedent involved, only the triggers and consequences written within the system.

At that time, crude versions of such protocols were already in use as DCP (Digital Cash Protocols). For example with POS terminals and cards. But the vision of Mr. Szabo was a broader one. His goal was to minimize the need for trusted intermediaries, which in turn was supposed to lower fraud loss, arbitration and enforcement costs, and other transaction costs.

The future will be automated

In almost every aspect humankind is turning towards automation. Nearly every Science Fiction movie shows a future in which a giant computer system deal with most of the day-to-day activities. Our civilization stands on the brink of another revolution, maybe even greater one then the industrial revolution of the XIX century. More and more work is automated – production is no longer made by skill workers, instead of by complex robotics systems, same goes for the financial world. The future will be automated, the key is to design a process that is flawless, and impenetrable by any wrongdoers.

Young genius brings the solution

Vitalik Buterin is known in the world of Blockchain as a visionary. No wonder. At a very young age of 19, he released a paper describing a new system that improves Satoshi Nakamoto’s original idea. Ethereum – an open-source, public, blockchain-based distributed computing platform and the operating system has shaken up the old order in the digital world. Thanks to smart contract (scripting) functionality, Ethereum is not only faster than Bitcoin’s blockchain (14 – 15 seconds on every block compared to 10 minutes), but it also requires lower fees for the transaction, and lower computing force for mining. So finally – a vision of Nick Szabo is implemented.

What’s next?

Let’s back up a bit, to our hypothetical situation of buying a house. Let’s imagine we can use similar system to Ethereum, to not only complete the transaction financial-wise, but also check every detail of the seller’s assets, and enforce the contract itself, all in the space of 15 seconds. You do not have to wait for an intermediary to clear your transaction. Whom, let’s face it, aren’t always trustworthy as the 2008 financial crisis has shown us.

The lack of this third party doesn’t mean any less security for the contract – au contraire – it minimizes the risk of the human factor leaving it all to a simple ‘ifthisthanthat’ logic. If a buyer has sufficient assets, and if the seller has all the rights to a property, and they both consent to a transaction, than they strike a deal, almost instantaneously without a need to go through any centralized institutions.

It’s just a matter of time for the mainstream world to adopt this system. Now you know the basics, now think about the possibilities and problems which Smart Contracts can solve.

Here you can read about our blockchain implementation for the Rainforest Foundation, and here you can learn about our Blockchain Loyalty System build for the HackYeah Hackathon Challenge.

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