How to Be Smart with Smart Phones and Smart Contracts

January 26, 2016
How to Be Smart with Smart Phones and Smart Contracts

Smart Contracts are mentioned more and more frequently on the Internet. Banks issue investment advice and publish research, journalists write articles describing the hi-tech future, and opinion leaders share their forecasts about when Smart Contracts are going to turn the world around.

The forecasts, as it often happens, are too optimistic, and the possible effect that Smart Contracts will have on people's lives is exaggerated. Should we keep going deeper into this field and keep track of development and adoption of Smart Contracts?

Bytecoin Team's view: Yes, we certainly should. Despite the fact that Smart Contracts cannot reform our world as much as some activists believe, they will have a niche in the world economy: Increase reliability of the contracts, reduce the role of the State in economy and automate many routine processes.

In order to improve the world, Smart Contracts should be implemented smartly. To do this, we need to start with some non-utopic capabilities of Smart Contracts, but approaching them from their limitations.

What are Smart Contracts?

The main difference between the Smart Contract and the traditional one is that it is executed automatically, and breaking a Smart Contract is harder than stopping Godzilla from destroying Tokyo. Neither party can negotiate with a Smart Contract nor bribe it. If the conditions of the contract are met, it will execute exactly what was written in it.

For example, our hero Harry decides to go to Europe for a vacation. Being a modern man, Harry decides to rent a private flat and arranges this with the owner, Tomasz, in advance.

Harry and Tomasz enter a contract stating that on July 4, 2017, Tomasz will meet Harry at the terminal, take $200, take Harry to the flat and give him the keys. A week later, Tomasz will come back, take the keys, check the flat and wish Harry a good flight.

The parties in question can enter such an agreement using Skype. No need to involve attorneys, civil-law notaries or FedEX.

Unfortunately, this kind of informal agreement includes high risks. Harry might cancel his vacation to Europe at the last minute, and Tomasz might decide not to lease his flat.

If Harry and Tomasz have known each other for a long time and have mutual friends, it is easier for them to trust each other in such situations. If this trust is out of the question, they could use a mediator like AirBnB.

Entering a Smart Contract will reduce the risks without any mediators. Moreover, trust is not necessary in this case.

A Smart Contract requires a platform that would ensure its execution. The Blockchain-based platform would leave any mediator, be it a man or a company, out of the process. Harry and Tomasz can select Bytecoin Platform in this case (today they cannot, but in 2017 they will have such an option).

Special software helps Harry and Tomasz to enter a contract, which will be stored in the Bytecoin's Blockchain and will be automatically executed come the stated time.

According to the terms, Harry receives a temporary electronic key to the flat and Tomasz receives $200 on July 4, 2017, at 12:00. The moment the Contract is signed, $200 equivalent is locked in Harry's account and the key to Tomasz's flat is encrypted and saved in the body of the contract.

At 12:00, July 4, the key to the flat is decrypted by Harry, while $200 is sent to Tomasz's account. Here, the Smart Contract acts as an intermediary and holds the money and the key until the required time. Therefore, no one had to act first.

The Smart Contract, which requires no mediators and allows for trustless agreements, is an interesting case. However, it is not obvious yet, why a Smart Contract would be better than AirBnB.

Smart Contracts Need Smart Locks

In theory, Smart Contracts can be executed upon any event. In all practicality, capabilities of the platform used for the contract are limited. It cannot get data about any event, and it cannot perform any operation. Therefore, possible development of the platform lies in developing the two major capabilities: receiving information from the real world and performing operations in the real world.

In Harry's case, a Smart Contract is not advantageous. Granted, he is guaranteed to get the key, but who will guarantee that the key fits? A Smart Contract can transfer money from Harry's account to Tomasz's, but it cannot check if the key fits the lock...

For protecting Harry's interests, another add-on is required: the Internet of Things.

The lock installed in the flat should be equipped with an access to the Internet. Then, the Bytecoin Platform can check if the lock has a hardwired condition for this particular key to open it during Harry's vacation. It must be hardwired without the possibility to cancel it.

The Internet of Things will allow the platform to perform different actions in the real world. The functionality of the Bytecoin platform itself is limited to money transactions from one account to another. The Internet of Things enables the smart property - when an object (e.g. a flat) can be owned by different people at different times according to Smart Contracts.

"In order to make Smart Contracts an important part of our everyday life, we need to develop the Internet of Things."

In one of our previous posts we described how we could use Smart Contracts with smart items in order to create an automated flakes-delivery business using a chain of contracts. The business built using Smart Contracts features a high grade of automation. Any routine action can be automated, while the people will have more free time to deal with creative problems.

Oracle's Problem

Developing the Internet of Things for solving the issue of execution of Smart Contracts is comparatively simple. There is another issue though: How would the platform get the data that an event has occurred?

In our previous example, the event is a fixed moment in time. The platform can figure out that the time has come by using the clock. However, the events can be a lot more complicated.

Harry and Roger support different football teams. Harry believes that the New England Patriots are going to win the Super Bowl in 2017, while Roger believes that the Denver Broncos will be the winner. They are ready to bet $100 each that his particular team will win.

A Smart Contract is executed easily here. When it is signed, Bytecoin Platform locks $100 equivalent on Harry's and Roger's accounts. If the Patriots win, then, according to the terms, Harry gets back his $100 and Roger's $100 is transferred to Harry's account. If the Broncos win, Roger gets all the money. If any other team wins, Harry and Roger both get their own money back.

How can the platform learn which team is the winner? In this case, the problem is solved by using a trusted source of information. The Super Bowl winner, we are sure, will be noted on the NFL website, so the line on that site should be checked after the Super Bowl officially ends.

The source of such data is an Oracle. The clock served as an Oracle in the vacation case, and the NFL site is an Oracle in the Super Bowl case. Development of the Internet of Things would lead to an increased number of possible Oracles. Still, there are some cases when no algorithm would help you find out what events have occurred...

Human Oracle

Sometimes, the event might be unique and complex to such a degree that automation is useless. In such cases, we can involve a third party - a human - to decide if the event has occurred or not.

Harry states that he can perform a handstand after a gallon of beer. Roger is sure that Harry will fail. How can our platform find out that Harry performed (or failed) a handstand?

In order to make a Smart Contract for this case, we need a third party: Michelle.

The participants sign the following contract: If Harry can stand on his hands for at least three seconds after a gallon of beer, Roger pays him $100. If Harry fails, he pays Roger $100. Michelle will referee and decide if Harry managed the handstand.

After the contract is signed, $100 equivalent is locked on both Harry's and Roger's accounts. Michelle referees and decides who gets the money. The basic difference from a bar bet is in the fact that Michelle does not have the money, she only decides if the event occurs or not.

If Harry and Roger trust Michelle, they can simply give her $100 each and start the test. What if they do not trust her? What if they met her only five minutes before the bet? While the boys test Harry's vestibular system, Michelle can simply run away with $200.

The Smart Contract, by its very nature, does not require any trust between the betting parties. Michelle only makes a decision, but cannot manage the money. If she does not decide anything, the money will be unlocked on the respective accounts and no one suffers.

Is It Worth Investing?

Based on the examples above, we can see that Smart Contracts have the following major features:

  • Eliminates the mediator. The companies like Uber or AirBnB make their business by being a mediator for a large number of private agents. Smart Contracts allows people to leave the mediator completely out of the equation. Even in the cases when a human Oracle is required, he does not possess the money. He only makes a decision.

  • Automates execution. Smart Contracts, combined with the Internet of Things, allows for automation of many processes. Concerning business in particular, Smart Contracts would allow for automating accounting and speeding up the money flow. Smart Contracts based on Bytecoin Platform will require approximately 120 seconds to be executed, so even the longest chains of contracts between many contractors can be processed in a matter of minutes, not days.

  • Removes or reduces the issue of trust. As a Smart Contract is executed, inevitably the terms and conditions cannot be changed due to a wish on only one side. Despite the fact that Smart Contracts cannot have absolute power in the world, they can significantly reduce the risks of deals between strangers.

Although Smart Contracts start with betting, in the future they will become as familiar as the Internet is now.

However, just like any other innovation, Smart Contracts have a long evolution path ahead. What lies there, and how soon will Smart Contracts become a part of our everyday life, nobody knows. But we will develop this area and publish information concerning this exciting possibility in our future posts.

Recent posts