Blockchain - What Are Smart Contracts?

If you think of blockchain as an operating system for data, then smart contracts are its killer app. Smart contracts add complex logic and rules atop a blockchain that can automate traditional contract management and digitize the world around us the same way apps like Uber are automating away the need to wave your hand in the air to hail a cab.

You can't talk about the future of blockchain without explaining the role smart contracts will play. If the world is going to run on blockchain, much of it will rely on smart contracts to execute the data exchanges and program in rules to govern how each code-triggered agreement works. Smart contracts are also a flexible mechanism that can serve as the blockchain middleman for all manner of agreements and data exchanges, down to something as simple as verifying someone's identity to ensure they're of legal drinking age.

"Think about getting carded at a bar," said Jerry Cuomo, Vice President of Blockchain Technologies at IBM. "From an identity perspective, I can imagine a blockchain managing verification of a citizen's identity. A smart contract could ensure something like my daughter going out for her 21st birthday and the bouncer only being able to see her age, not her address. Blockchain could set up a centralized identity verification system that could make the world safer for dads like myself."

Identity management is an application to watch, but the list goes on and on. The Chamber of Digital Commerce, the leading trade association that represents the blockchain industry, runs the Smart Contracts Alliance. The Chamber and Alliance (in collaboration with Deloitte) released a white paper entitled "Smart Contracts: 12 Uses Cases for Business & Beyond" detailing a dozen broad areas and industries where smart contracts could change the game.

In a broad legal sense, smart contracts provide what Bloq's Garzik calls ""adjudication-as-a-service:" a real-time version of the court system that, for finance scenarios, can cut time on deal closings, banking and securities transactions, and even global trade finance from weeks or months to days, hours, or minutes. On the digital identity front, the white paper calls smart contracts a "user-centered Internet for individuals" giving users control over the data, digital assets, and online reputation associated with them. Blockchain also affords the ability to decide what personal data is and isn't shared with businesses—the same concept behind the driver's license analogy.

Beyond identity, the white paper also talks about how smart contracts can be applied to getting a mortgage and instantaneously processing auto-insurance claims. In the medical research field, they can serve as a mechanism to ensure better patient privacy in clinical trials while promoting more open data-sharing in the cancer research community. Another of the paper's use cases is land titling. Countries around the world, including Ghana, Georgia, and Honduras, that are typically rife with property fraud and land disputes are already implementing smart contracts to facilitate property transfers and land ownership.

Real-world smart contracts are also gaining traction in a few other interesting ways. Everledger is a blockchain-based fraud-detection system for valuable physical assets, particularly jewelry and diamonds. It uses a hybrid blockchain that combines the Bitcoin blockchain with its own private blockchain to build smart contracts that certify physical diamonds. It combats the sale of conflict diamonds by keeping a transaction history for each gem.

"Everledger takes a diamond or a piece of art and hashes it to the blockchain," said MIT's Forde. "For something like a diamond ring, Everledger takes an image of it—like a unique diamond fingerprint—which can then be scanned against the blockchain to verify it's the same one."

Once you open the door of tracking and manage physical assets, smart contracts can tackle the whole supply chain. IBM and Walmart are even partnering in China to track the movement of pork (seriously) to keep people from eating tainted meat.

You can also use smart contracts for digital content such as music. Mycelia, a "collective of creatives, professionals and lovers of music" founded by musician Imogen Heap, is a blockchain-based protective ecosystem pushing smart contracts as a way for musicians to share free-trade music and to ensure the profits go back to the artists.

Mycelia is an example of blockchain and smart contracts' potential for digital rights management (DRM). Smart contracts in digital music files or other copyrighted material might enable artists to better sell directly to consumers without the need for labels, lawyers, or accountants, with royalties paid out automatically.

A sleeping giant in this conversation is the effect smart contracts could have on the Internet of Things. Think about all the data smart devices collect. Fitness trackers collect your body's vital statistics. Thermostats collect temperature data. Alexa has records of every search and request you've ever asked of her. If the IoT ran on a blockchain, and smart contracts governed that real-time data, it could create a whole new class of lending and other usage-based agreements, according to Erin Fonte, Head of the Financial Services Regulatory and Compliance Practice Group at corporate law firm Dykema.

"If you had smart and connected cars that could report back actual usage stats, you could tie pricing into real-time usage and have it automatically adjust over the length of your vehicle lease and financing," said Fonte.

Think about how connected devices enable mobile payments without traditional credit card swiping at the point of sale. Instead of swiping your card at a terminal, you touch a thumb to your iPhone to use Apple Pay. The automated payment system is authenticating individuals and providing verifiable legal proof of transaction authorization, just as a smart contract using those same two permissions—authorization and permission—in an IoT device can make a transaction legally enforceable against a buyer or seller, which is particularly applicable in machine-to-machine (M2M) communication.

"Amazon Dash buttons are a prime example," said Fonte. "It's one little branded button you stick in your house, and then you don't have to log onto Amazon to reorder. Just press the button, and it repeats its last order. For connected homes and cars, blockchain's ability to monitor, collect, and make sense of data for transactions will drive the ability for humans to authorize machines to carry out activities like this as agents. The next step is that you don't need a button. Manufacturers will create customer and end-user [smart contract] agreements on the back end. "Your washing machine will have that feature built into the product itself."

How We Build a Blockchain-Based World? - coming soon...

Source: | by ROB MARVIN
Read more here: Blockchain: The Invisible Technology That's Changing the World.