Technologies we use

Blockchain and Smart Contracts

What is a smart contract? Smart contracts by definition are are digital contracts that allow us to generate binding and provable terms through blockchain technology. They can be used for exchanging money, shares, property or other valuable goods, or even just used as an agreement to do something. It allows for two parties in two locations to agree to a binding contract without the need for a middleman, such as a lawyer or notary. These agreements may also be anonymous if desired.

Smart contracts are self-executed; the terms of agreement are written into the lines of code. That code (and the agreements) exist within the given blockchain network. This is what’s known as blockchain programming. Ethereum currently has the most prolific smart contract ecosystem. To implement a smart contract using the Ethereum blockchain, you pay for this service with Gas (a token which is currently a small percentage of the value of Ethereum). You can find out more about using this blockchain in our article, Ethereum for Smart Contracts. Other blockchains also support smart contracts - check out our blog post on Bitcoin's smart contracts.

Cryptocurrency transactions are smart contracts: whereby one party agrees to send cryptocurrency to another person. So if you’re asking which came first - the cryptocurrency or the smart contract? - the answer is the smart contract. It’s how Bitcoin transactions are binding.

Smart contract technology - how does it work?

A smart contract transaction starts with creating the code behind the agreement. This code is then posted in the blockchain. Then, a specific event triggers its execution. Examples of such triggers include receiving or sending money, an expiration date being reached, or a price raising above a given value. After the triggering event, the contract self-executes in accordance with the terms agreed upon and written into the code. Both parties receive what they decided on in the contract. In cases when conditions are not met, it is up to the program to decide what to do next. In cases where it’s an escrow funds type situation, the program decides if funds should be send back to its owner or not, or perhaps returned minus a deposit amount - whatever clauses have been agreed to in the smart contract.

When the contract is executed, all details of the transaction will get stored on the blockchain network. This provides transparency of the transaction and makes it completely trustworthy by design.

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How is using a smart contract better than using a regular contract?

There are many reasons why using a smart contract is a wise idea. Using a smart contract helps minimize the risk of poor transaction outcomes for either party. It minimizes the cost involved from using a third party as a contracting service. By design, it minimizes the potential of unforeseen issues arising. It also minimizes the time spent on dealing with the contract. The aim of a smart contract is to satisfy all contractual conditions like payment terms, confidentiality, and lien or enforcement, all with the minimum possibility of facing any malicious or accidental exceptions and issues. Smart contracts are there to help users lower the risk and costs of potential fraud losses that can arise when using ordinary contracts.

Their other primary goal is to eliminate the need for intermediaries, in order to save costs on arbitration, enforcement and other transactions fees.

The key benefits of smart contracts

Since we now know what smart contracts are, let's examine the key benefits of using this technology for transactions:

Equality

treating both parties as equals, with both agreeing to terms

Transparency

transparent transactions with all the information stored in blockchain

Flexibility

functionality of multi-signature accounts, whereby transaction executes only when all people involved agree

Efficiency

eliminating middlemen and facilitators, saving time and money

Independence

no need to rely on a broker or lawyer to confirm the lawfulness of a transaction

Certainty

backup of the approved conditions stored in the blockchain, which eliminates the possibility of losing a contract or fraud from one of the parties

Safety

documents are encrypted and no one can hack them, although parties must ensure wallet safety for maximum protection in financial transactions

Speed

transaction is quick and self-executed

Smart contracts in the finance industry - how can they be applied?

Smart contracts can be used in just about any industry - if you think of an application you can create it! However, one of the most applicable industries is finance and trading. Businesses within the industry generally rely heavily on the role of the middleman, which can make transactional fluidity and timeliness difficult. With the use of smart contracts, it removes the middleman, making financial processing seamless and easy. If there a business uses a Letter of Credit, they can garner the smart contract conditions for trade payment initiation or methods of transmissions from this letter. It also stands to note that with self-execution of smart contracts, financial assets can potentially gain better liquidity. Smart contracts make the whole process of trading cheaper and more efficient. Do be aware that the financial sector is subject to many standards and laws which need to be taken into the account when creating a Smart Contract.

Another area of the finance world where smart contracts can come in handy is with mortgages. With smart contracts, the process of obtaining a mortgage can be automated, by connecting two parties and making them sign a contract virtually.

Smart contracts in other industries - what can they improve?

Smart contracts have the potential to benefit almost all industries. Smart contracts have huge potential in the supply chain automation process, as they can provide transparency and facilitate the real-time tracking of inventory, aided by the use of Internet of Things devices. Smart contracts could be deployed for insurance companies, whereby submitting evidence of a claim (such as a verifiable police report for theft) makes it automatically either accepted or rejected as per the terms. In real estate, changing the ownership of properties could be done without the necessity of meeting in person or using a middleman. Imagine buying a house on a different continent that you simply agree to the terms and it’s all yours. The smart contract would check that all conditions and legal requirements were met, as well as deal with payment processing. Or how about even using a smart contract for a pre-nuptial agreement?

Smart contracts have already been implemented in some government service departments. The city of Zug, Switzerland, has introduced citizenship verification via the Ethereum blockchain, so they are able to access certain government services based on their proven identity.

Which companies are already using smart contracts?

Companies that have already implemented smart contracts are mainly start-ups, fintech venture enterprises, payment services providers, and new technology developers. These are a few of the companies using Smart Contracts in commercial applications:

iZettle, social payments company founded in 2010 in Stockholm, allows sharing purchases with friends,
MarketInvoice, a British invoicing platform, founded in 2011,
SatoshiPay, a payment gateway for small transactions and Bitcoin established in 2014 in the UK,
Monetas, created in 2012, a Swiss developer of technology that connects smartphones to financial services,
ClauseMatch, provides matching, negotiating, managing trading agreements through cloud services and was created in 2012 in the UK,
Everledger, originating from the UK in 2015, an owner of a global digital ledger in blockchain that tracks and protects valuable assets across their whole lifetime,
Blockstream, founded in 2014 in the US, creator of an ecosystem for financial networks,
Ubitricity, a German creator of a virtual charging network that can convert power sockets into charging points for electric vehicles; the company was established in 2008,
Square, payment processing, inventory and sales tracking company, provides full point of sale services and tools, is a listed company founded in 2009 in the USA,
Elliptic, a custodian bank for the blockchain, founded in 2013 in the UK,

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