Week 3: Smart Contracts

Week 3: Smart Contracts

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Cyber-punks, libertarians and gamers

Between Bitcoin's launch in early 2009 and 2015 the crypto and blockchain space was pretty much made up of the early cyber-punks, freedom seeking libertarians, gamers and speculators. Bitcoin had opened up the possibility of moving value around the world easily and for a low cost and of course, it was permissionless (Peer-to Peer) so like with all new technology, it also attracted an array of criminals who saw it as an opportunity to avoid detection (more on that in a future piece). In these early days, it was still a space very much in it's infancy but some well respected business minds were already taking note. Even some top bankers and politicians were quoted as saying "We see the potential of blockchain but we don't like Bitcoin".

Ethereum and the ICO boom

In August 2015, Ethereum came onto the scene with a big bang and also based on a Proof of Work (PoW) protocol, it had a lot in common with Bitcoin but with the additional benefit of Smart Contracts - effectively contracts codified on a blockchain. This took the key benefits of blockchain pioneered by Satoshi Nakamoto with Bitcoin (decentralised, immutable and transparent) to another level and entrepreneurs quickly realised that this protocol could be used for a miriad of business ideas. The Initial Coin Offering or ICO era had arrived and literally thousands of projects were launched on Ethereum during the second half of 2017 and well into 2018. It must be said that the vast majority of these so called projects or businesses were worthless and many were scams that convinced wannabee overnight millionnaires with huge potential returns to buy their tokens with Bitcoin and Ethereum. Hence, a few people became extremely rich while others (a large majority) lost all or most of their investment. As always in a nanscent space such as this it is 'buyer beware'.

The media attention that blockchain and crypto attracted during the latter part of 2017 helped the whole crypto space, led by Bitcoin attract a lot of investment culminating in Bitcoin hitting $20,000 in early 2018 with a total market cap for the industry of around $800 Billion. Bitcoin had become a household name and the likes of the BBC and CNBC were talking about it non-stop. We then went into a 2 year bear market which saw many early investors cash out some of their profits, developers get building and Wall Street quietly start to enter the space.

The first Smart Contract - the vending machine

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We are all familiar with Smart Contracts because vending machines were the first to use the 'if - then' logic whereby you first make your choice, then pay the required amount and finally, you're served with your choice. Notably, this process misses out the third party, just like blockchain. A person called Nick Szabo, a forward thinking developer was one of the first to develop this type of contract and is well respected in the space.

Smart Contracts are programs that run on a blockchain which are a collection of code (functions) and data (state) that resides at a specific address on said blockchain. They have a balance and are typically the target of transactions.

What is important to keep in mind is that Smart Contracts are not controlled by the user, they are instead deployed to the blockchain and run as programmed. User accounts can then interact with the Smart Contract by submitting transactions that execute a function defined on the Smart Contract.

Like a regular contract, the contractual rules are defined in the Smart Contract which automatically enforces it through the code hence it cannot be deleted and transactions are irreversible. This brings up certain challenges such as if there is a dispute between the users of the contract. This scenario is one of the hot topics being worked on right now.

Let's put this all together by taking insurance as an example.

  1. Pre-defined contract whereby terms are agreed by all counterparties.
  2. An insurance claim event triggers the execution of the policy.
  3. The Smart Contract policy is automatically executed when the pre-defined terms are met such as a completed inspection by the insurance representative.
  4. Payout / settlement shortly thereafter

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The benefits to business are numerous with huge potential cost savings, boosted efficiency through reduced human error and a much faster transactions for customers. Also, as the transactions are stored forever on the blockchain (immutable), the tracing of transactions is more transparent and certain compared to a database.

Industry use-cases

Other than insurance, many industries can leverage Smart Contracts.

  • Finance (lending, borrowing, investing)
  • Entertainment
  • File storage
  • International payments
  • Voting
  • Identity verification
  • Internet of Things (IoT)
  • Supply chain
  • Ownership records
  • Energy
  • Charities
  • Sharing economy

Join us for session 4 where we'll look at private and public keys and how to interact with blockchain.

If you're interested in joining then please email me at [email protected]

Jeremy.

Disclaimer: The examples provided during the sessions such as Bitcoin, crypto and other assets are to help illustrate some of the use-cases of blockchain. This course is certainly not financial advice so if you decide to invest in any of the mentioned projects then that is at your own risk and I'd strongly advise you to do some detailed research beforehand.

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