What are Smart Contracts and how can they be used for assets?
An overview of smart contracts and how real assets can be integrated with them using the SharesChain platform.
A Smart Contract serves a very similar function as a contract does in the real world. Contracts, in typical cases, involve two or more parties that agree on certain terms, sign the contract, and once these terms have been carried out and both parties are content, the contract is deemed fulfilled. Smart contracts employ the same principle but are able to operate automatically via an algorithm that has the terms of the contract embedded within it. This allows for trust in a space where setting up certain types of deals can be difficult.
Smart Contracts in peer-to-peer exchanges
This can be more easily illustrated through a few different types of examples, and we will begin with the simplest: A direct exchange or a tit-for-tat exchange can be the most basic way to take advantage of a smart contract. This can be likened to the case where an individual has a Bitcoin and wishes to trade this for a fiat currency by means of receiving a direct deposit into their bank account. Platforms that provide this basic smart contract system already exist and one such example would be Localbitcoins.com.
The typical trouble, without smart contracts, arises immediately in the questions, “Who should send the money first? And how can I be sure the other party will reciprocate?” With smart contracts, however, the party that holds the cryptocurrency can deposit the appropriate amount of tokens into the smart contract and the tokens will be held there by the system. At this point we can consider the smart contract to be activated. The party involved in the activation of the contract by submitting his or her tokens will also provide the other party with their bank account details for direct deposit. The sender of fiat funds receives the contract order and activation, and then authorizes the direct deposit via their bank’s website — or whatever other means are available. After this step, they will provide a receipt or otherwise some proof of transfer. Once the party that activated the smart contract receives the fiat currency, they will mark the contract fulfilled by clicking a fulfillment button that releases the tokens to the other party.
As a security backup, the host of the smart contract is a third-party platform or entity responsible for facilitating any problems. If the party that activated contract doesn’t release the tokens after some preset or agreed upon amount of time, the third-party facilitator will request for the proof of transfer. They also possess the authority to release the funds of the smart contract depending on the terms and conditions prior to the contract’s activation. This way, disputes can be made, and all initial funds will be able to be distributed to the appropriate party thus ridding the situation of any potential scams.
Since SharesChain is the exemplar of an ITO aiming to digitize any type of asset by utilizing smart contracts, we can take the example of direct exchanges and examine some possible ways in which it could be utilized in other types of markets.
Example of smart contract applications for real assets
So direct internet exchanges are simple applications for smart contract outlines, but SharesChain offers the methods, integrated service providers, tools and frameworks for bringing in real-world assets to this picture. Say a user wants to sell their car; they could create a Smart Contract. The owner of the car has a real asset that links their identity to the legal “title” of the car.
This example has extensions far beyond the actual trading of the physical car, which we will outline later, but let us see how the trade of the actual vehicle from one person to another would work. The car owner would place their car in a storage unit that has a passcode to enter. The owner then, would write up a smart contract dictating: the price of the vehicle, their personal wallet account number, the passcode for the storage unit and the command to release said passcode once the value has been deposited into the smart contract account. Any disagreement would result in the smart contract returning the tokens to the original party that deposited them.
As soon as a buyer agrees to the price, they would deposit the amount into the owner’s account and the smart contract would execute to release the passcode to the new owner. The smart contract would also have to be backed by a legally verified document in the real world, the title, that would update to relinquish ownership of the vehicle. Thus, it legally registers the buyer on the blockchain as the new owner of the vehicle.
Of course, ideally there would be some assurance that the car was in good shape, and this would be the job for specialized service providers. Otherwise, the owner could just as easily have put a big box in the storage unit where the car should be, but delegators, facilitators and service providers will be able to provide users the necessary assurances. The SharesChain network can provide access to these specialized service providers along with an integrated mechanism for paying them to employ their capabilities. Smart Contracts could potentially make buying a car as simple as buying a new pair of shoes on Amazon.
To extend the impacts of this example, let’s assume the seller from the previous case is instead the manufacturer. They deposit these cars in an official warehouse where people can go and pick up their new car. The greatest benefit here is that there would be no need for centralized dealerships. No need for haggling and the making of deals with questionable sellers, only to be left feeling uneasy as to whether or not it was the correct choice. It would not require much additional configuration of the smart contract to incorporate other factors of vehicle acquisition such as the test-drive factor. In the very least, the art of haggling will be left up to the individual seller and the processes can largely be completed online.
Dealers and manufacturers are not the only parties that could benefit from this process as car rental companies, leasing companies or private companies that participate in temporary car-share programs would see great value in this decentralized capability. The corporate solutions available would only be limited to our imagination in how to utilize this platform and framework.
There are unlimited potential applications
This is just one example of how a smart contract and its application to real assets can help in a variety of different ways because cars provide a nice illustration since the title transference process and the physical aspect of the car are reasonably simple to imagine. However, applications to the vast amounts of other assets available such as the different types of real estate deeds would be another. Over the coming weeks we will explore other various examples that the SharesChain ecosystem makes possible.
Smart Contracts on their own can’t do these things, as they are limited to the blockchain. They serve to fulfill a task that is run on the basic principle of if/then. If the money is deposited in the account, then it will release the tokens to the sender of said money. This is simple enough for a basic formula, but when one wants to place a legal asset on that smart contract, the rules and terms the contract runs from must be in line with the legal regulations that correspond to their state’s local guidelines. That is why SharesChain possesses so much value in the sense that it provides the framework by which one can make the smart contract actually follow those rules.
The Smart Contracts work solely within the blockchain. Thus, any information or commands it can use, or give, must be within the blockchain. If it needs to go beyond the blockchain for external data, it requires the help of an Oracle.
Stay tuned for our article on how SharesChain will use smart contracts with an Oracle application for maximum utility in the real world of trading assets.
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