Ether Explained – Chapter 8: Smart Contracts on the Ethereum Platform
20 August 2019Reading time: 7 minutes
Vontobel
now offers investors access to the crypto currency «Ether». But what is Ether?
And why has the second best-known crypto currency gained so much popularity in
such a short time? In eight chapters, we want to give you high-quality
knowledge about the exciting topic of «Ether».
Ethereum-Blockchain: Perfect
environment for Smart Contracts
Smart Contracts are self-executing contracts that come into force at
certain events and are based on computer protocols. The code and the contained
agreements exist via a decentralized blockchain network. These smart contracts
allow trusted transactions and agreements to be executed between anonymous
parties and without a third party. And legal security should still be guaranteed.
At the same time, they enable the automatic execution of contracts under
certain conditions. Smart Contracts make all transactions traceable,
transparent and irreversible. They are comparable to conventional contracts,
such as those concluded when buying a car or an employment contract. However,
they are cheaper and more efficient. Human error sources are almost eliminated.
Ethereum is the best-known blockchain platform that offers Smart Contracts.
How Smart Contracts work using
blockchain technology
Smart Contracts automatically execute transactions and other specific
actions within a network with parties who do not necessarily trust each other.
The conditions to which both parties must adhere are pre-programmed in the
contract. Thereby there is the principle: "Code is law". Upon
conclusion of these conditions, a transaction or other specific action is
initiated. Smart Contracts are processed exactly as they were programmed, i.e.
without censorship, downtime, fraud or interference from third parties being
possible. At the same time, all contractual partners are informed of status
changes in real time, because the decentralized blockchain architecture means
that everyone must have the latest information at their disposal so that it
remains secure.
Smart Contracts could considerably facilitate a complete sales process
(e.g. a house sale). These contracts solve the problem of trust because they
function according to the "if-then" principle, i.e. ownership of the
house is not transferred to the buyer until the agreed amount of money has been
transferred to the system. This means that both the money and the right of
ownership are stored in the system and allocated to the parties involved at
exactly the same time. In addition, the transaction is verified by the network
to ensure error-free delivery. Since the problem of trust between the parties
has been solved, there is no need for an intermediary: All tasks performed by a
real estate agent can be pre-programmed in a Smart Contract, while both the
seller and the buyer save considerable amounts of funds.
Advantages of Smart Contracts
- Trust - Smart Contracts can involve
multiple parties who do not trust each other completely. This is because the
fulfillment and monitoring of contracts is completely automatic. The unbiased
system of intelligent contracts therefore makes trust unnecessary.
- Autonomy - Smart Contracts eliminate the
need for a third party such as lawyers, attorneys, real estate agents and
notaries: Contracts are monitored and adhered to without human interaction or
manual intervention. If an employee is absent, delays can occur in the company
or at the customer's site. When Smart Contracts are used, this problem does not
arise at all because they enormously reduce the operational risk of the
contracting parties. The rights of the contracting parties can be enforced
automatically. Thus, for example, the bailiff's profession is at risk: if a
customer does not pay the rate for his car, access to the vehicle can be
automatically blocked.
- Costs and time - Since intermediaries are no
longer needed, the usually high fees they charge are eliminated. In addition,
Smart Contracts can save a lot of time normally spent manually processing paper
documents, sending them or transporting them to specific locations.
- Security - Smart Contracts are protected
from hackers by complex cryptographic encryption: No one can steal or lose
documents because they are stored encrypted in a secure, decentralized ledger.
In addition, no one can subsequently change the negotiated terms of the
contract. Furthermore, Smart Contracts are very reliable, because with correct
programming, interpretation difficulties of the contract conditions are nearly
impossible.
- Means of payment - It is possible to implement
crypto currencies as means of payment in Smart Contracts. This means that contract fulfillment can be paid directly in a crypto
currency such as Ether.
Disadvantages possible
- Programming errors - Smart
Contracts are an extremely young technology and therefore not yet fully
developed. For example, the program code could be faulty. Since information on
a blockchain is unchangeable, such errors cannot be corrected afterwards. Due
to a programming error in a complex smart contract in the form of a
"DAO", hackers were able to steal USD 50 million worth of Ether in
June 2016. As a result, a hard fork was carried out, resulting in the crypto
currency Ethereum Classic.
- Novel technology - The
novelty of the technology raises many questions. How are smart contracts
regulated by the government? How are they taxed? What happens if the smart
contract does not have access to the subject of the contract or something
unexpected happens? (If this happens with a classic contract, it can be revoked
in court.) Nevertheless, the technology has great potential and will certainly
be optimized over time.
- Unchangeability - In
contrast to desktop or web applications, continuous updates of Smart Contracts
are not easily done. This means that a Smart Contract code can no longer be
easily revised without questioning the integrity of the data stored in the
blockchain. However, the conditions for the performance of the contract may
change by coincidence. It is also possible to program backdoors into the
program code. The reliability and immutability of a Smart Contract based on a
blockchain thus depends on its programmers. If they have bad intentions, they
could send spam through a harmful smart contract or act as bots within the
blockchain.
Application possibilities of
Smart Contracts
Smart Contracts make sense wherever contracts need to be concluded quickly
and without human or business obstacles.
- Financial sector - Since
Smart Contracts were created in the context of crypto currencies, they are
still predominantly used in the financial sector. For example, they focus on
international payment transactions in order to make transfers faster and more
cost-effective. In addition, the processing of securities transactions is seen
as a promising field of application. The issue of bonds has also been initiated
using blockchain technology: Together with the World Bank, Australia's largest
bank, the Commonwealth Bank of Australia, has issued the first blockchain bond
on the Ethereum platform. Daimler has also placed a blockchain-based promissory
note together with the German Bank LBBW.
- Governments - Democratic
elections would be possible with this technology. This could be based on an
agreement between the respective government and the citizens of the country. It
would not only allow the government to see who voted, but also allow citizens
to vote conveniently with one click.
- Energy sector - For
example, electricity supplier RWE offers its customers Smart Contracts via the
Ethereum platform so that they can easily pay for their electricity at
electricity filling stations. Instead of cumbersome payment systems, vandalism
of vending machines and the slow processing of payment transactions, electric
car drivers pay by blockchain. The transaction is just as fast and convenient
as cash - but without the security risks. Such systems are also possible for
electricity customers who are also producers using solar cells in order to
guarantee qualitative billing.
- Supply chain management - Supply
chains of goods usually consist of several parties. From the consumer, via the
retailer, the wholesaler, the company, the supplier and the producer, Smart
Contracts on a blockchain basis can offer all parties a common contractual
basis. The parties would then be able to track in real time what stage the
product on offer is at.
- Healthcare - Patient-related
data could be presented in a smart contract for the patient as well as for
doctors and insurance companies. All data could then be visible at a glance.
Patients could also decide individually which data they want to disclose.
- Real estate - Smart
Contracts can not only regulate tenancies, but also simplify the purchase or
sale of real estate.
Smart Contracts are tomorrow's
type of contract - with Ethereum as a hyped pioneer
Smart Contracts are an
innovation compared to conventional contracts. They could provide tomorrow's
type of contract as their implementation provides security superior to
traditional contract law, they facilitate the exchange of money, property and
other valuables, they reduce transaction costs and resolve issues of trust
between the parties. Theoretically, they have many uses. However, the
technology and practical implementation are still in their infancy.
Nevertheless, Smart Contracts are used in most crypto currency networks and are
one of the most hyped features of Ethereum.
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23/03/2023 09:05:28