The Power of Smart Contracts: What are Smart Contracts? How will smart contracts set off a revolution in the future?
Smart contracts can completely subvert existing business logic. Currently, blockchain technology and cryptocurrencies are widely discussed, yet self-executing smart contracts on the blockchain are often overlooked or even misunderstood.
The Internet has completely subverted the way people process information and interconnection. Similarly, smart contracts will fundamentally change the way individuals and organizations reach agreements and fulfill them.
The large-scale application of powerful and reliable smart contracts will be the cornerstone of ensuring the smooth operation of society. Everything in our lives—work, play, financial agreements, terms of deals, and more—depends on promises being fulfilled by all parties to run smoothly. The more watertight the contract is, the smoother the cooperation will be. Therefore, since smart contracts are more secure and deterministic, it improves social fairness and is more community-centric.
In this article, we discuss how smart contracts differ from traditional contracts, and how smart contracts can fundamentally bring about social change.
What is a smart contract?
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Compared with standardized traditional contracts, smart contracts have two advantages
First, records in smart contracts are trusted and shareable. Since the content of the smart contract is very secure, the parties to the contract do not even need to back up, which will bring great value to modern enterprises, because there are usually multiple departments in modern enterprises, and these departments cause workflow problems due to the lack of a single trusted record. conflict.
Second, smart contracts are highly deterministic. Traditional contracts sometimes cannot be performed as agreed due to mistakes or the unwillingness of one party to perform the contract. The environment in which the smart contract operates determines that it can be executed strictly in accordance with the agreed terms, without the need for approval in every link. If the pre-set conditions are met, the key parameters in the contract will be automatically executed.
How do smart contracts work in the background?
Today, most exchanges require a trusted third party to cover counterparty risk due to failure of one party to a transaction. Transacting directly with strangers can be hugely risky and extremely inefficient. Both parties to the transaction will have concerns when performing the contract, because there is no guarantee that the counterparty will also perform the contract. Therefore, many companies provide a trusted value exchange intermediary in their business models, including Uber (Uber matches drivers and passengers), eBay (eBay connects sellers and buyers), and Nasdaq (links financial products). buyer and seller).
The decentralized architecture of the blockchain removes the middleman in the transaction and ensures the trust of both parties to the transaction. Blockchain replaces a trusted third party with a more open, reliable and secure protocol that both parties trust, but neither can influence or control. Blockchain replaces centralized servers with a decentralized computer network, running the same software, processing and recording transactions in the network in a shared ledger. Distributed computing ensures the accuracy of the ledger, while a decentralized network ensures the security of the ledger.
Smart contracts are a scripting language on the blockchain. If/then conditions are added to the scripts, the transactions on the blockchain can be mirrored to simulate contracts in the real world. For example, if the asset price reaches a certain price on a certain date, the operation of paying the counterparty is performed. Smart contract developers can write contract terms according to specific requirements.
Then hook the if/then conditional parameters with the external API of the smart contract. For example, the data input of a smart contract can be the market price of an asset at a specific point in time, while the data output can be a real-world operation triggered by the smart contract. Data output covers a wide range of topics, including payments, data transfers, account balance updates, access rights, and more.
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What value do smart contracts hold?
Traditional contracts are based on probability, while smart contracts are deterministic. Once put on the blockchain, the smart contract will be executed strictly according to the code. Because smart contracts are self-executing, neither party to the contract can change the terms or break the agreement. Whether a contract has certainty also determines whether its payment can be guaranteed. In today's fiercely competitive market, if a company can guarantee its payment as agreed, it will greatly improve its competitive position among customers and suppliers. In fact, the supporting theory behind deterministic contracts is game theory, and game theory also determines that smart contracts will be more reliable and bring more profits.
In a world of probabilities, many companies default on their contracts, whether intentionally or not. To resolve disputes over non-compliance, companies hire armies of lawyers, accountants, and customer service to draft contracts, track payments, and handle counterparty complaints. Smart contracts can minimize or completely eradicate such problems for the following reasons:
Automated execution: Smart contracts utilize a decentralized network architecture to automatically execute contract backend processes, including custody, maintenance, triggering, and settlement. Once the contract code is completed and sent to the blockchain, the contract will be executed strictly in accordance with the code, and no human intervention is possible. As a result, company-related operating expenses will drop significantly over the life of the contract.
Reliability: Smart contracts have a high degree of autonomy, so reliability is much higher than transactions through intermediaries. Since there is no middleman, there is no way to bribe or attack the middleman, and there is no server downtime. Since smart contracts have no compromise mechanism and cannot escape contractual obligations, they are naturally tamper-resistant and secure.
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Which industries are most suitable for the application of smart contracts?
Insurance:
Insurance:
Insurance products allow people to engage in high-risk economic activities that they would otherwise avoid. But because of the lack of trust in the insurance system, people don't even think about buying insurance. In emerging industries and geographic markets, the results of insurance claims are full of variables, and sometimes even if the claimant presents sufficient evidence, he may not be able to obtain compensation as he wishes. In addition, claim settlement itself is time-consuming and labor-intensive, and the cost of property insurance claim settlement management is as high as 24% of operating costs.
Smart contracts will reshape the trust relationship between insurance companies and customers, replacing human intervention in the process with a decentralized network and automated execution. The blockchain can truly and reliably record all claims, avoiding repeated claims for the same accident. Smart contracts can also automatically trigger payments based on external data.
For example, many industrial devices are equipped with IoT sensors. Sensors detect equipment failures and automatically trigger insurance contracts, which are automatically executed and paid directly to corporate policy customers. Enterprises can immediately purchase new equipment to ensure business continuity as much as possible. The data proving the occurrence of the event can be transmitted to the contract, so the contract can be executed strictly according to the agreement, and the compensation can be paid automatically. Both insurers and customers can trust tamper-proof data from oracles and automatically execute tamper-proof smart contracts.
Smart contracts can also be used to automatically calculate premium discounts, such as health insurance discounts based on biometrics, or car insurance discounts based on vehicle driving data. Complex premium models require more time to develop, while simple premium models such as travel insurance have already been developed (such as Fizzy developed by AXA).
Financial derivatives:
The financial derivatives industry can also use smart contracts to build trust. The derivatives market is extremely large, estimated to be between 10 trillion and 10 trillion US dollars. The value of the financial derivatives industry is high but the level of trust is low, and the parties to the transaction may delay payment or not pay directly. In addition, there are inefficiencies in the derivatives industry, which lead to higher costs, such as custody, liquidation, reconciliation, manual data entry, duplication of data, etc.
Smart contracts guarantee on-time payments and automate most of the back-end processing of contracts. It also eliminates intermediaries and manual processes, simplifying operations. In fact, if financial derivatives can widely use smart contracts, a certain financial crisis may not happen. Risk can be better managed as companies cannot delay or fail to pay.
Smart contracts are expected to reduce the cost of personal loans by $480-960 and reduce the cost of personal loans in the US and Europe by a combined $3-11 billion. If we had smart contracts in 2008, we would have achieved a greater degree of transparency and reduced the impact of the subprime mortgage crisis.
Before 2008, people would apply for home mortgage loans from multiple banks and buy many properties. Financial institutions of all types (banks, hedge funds, and financial corporations) package, slice and resell millions of loans as investment products. These loans are neither transparent nor well documented.
If smart contracts were used at the time, each loan applicant would have an individual record, ready to be read at any time. Each mortgage packaged into a security product is tagged with other smart contracts, which contain millions of small contracts that can be easily accessed and read. Loan officers can evaluate this secure, public, and authentic record in detail to determine an applicant's eligibility for a loan.
If smart contracts were applied before the 2008 financial crisis, would financial institutions still abuse credit default swap (CDS) derivatives? This question is worth pondering.
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What's next?
What's next?
Smart contracts will revolutionize countless industries, including identity management, banking/payments, stablecoins, supply chains, real estate/title records, intellectual property, and healthcare records, among others.
While the development of smart contracts is still in its infancy, its real value is evident. Competition is fierce in the real world, so all companies will pursue contracts with lower costs and higher benefits. The key question is not "if" these companies will apply smart contracts, but "when" they will apply. Often, when a new technology emerges, there may be one or two companies that go all out to create a few successful use cases, and then the entire market follows suit to stay ahead of the competition.
The Chainlink team believes it is only a matter of time before smart contracts become the industry standard. However, if smart contracts are to become the predominant form of digital contracts, they must be decentralized, tamper-proof and reliable throughout the process. Therefore, Chainlink has developed a decentralized oracle system to connect smart contracts with external APIs in a trustless manner, which is a necessary condition for the success of smart contracts in various mature industries.
