Smart Contracts and Usage Areas

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Coinmonks

9 min readFeb 17, 2022

Introduction

When we take the counter called history back and bring it to the 90s, when the internet and computer technology were new among the people, Nick Szabo, a lawyer and computer scientist in the United States, reveals the smart contract protocol. In those days, Nick Szabo removes the third person that is the state in the contracts created with the traditional method and loads its role in the contract into the software. If we fast forward the counter and come to 2008, this year we see the FED, which caused the housing bubble in the United States of America in 2007 and spread all over the world a year later, causing the world’s fourth-largest investment bank Lehman Brothers to go bankrupt with a debt of 613 billion dollars. It is faced with a great crisis in which, intervenes with cheap liquidity and this liquidity causes inflation. There is one more event that takes place, although it was not taken into account at the time. A white paper is published by the person or persons nicknamed Satoshi Nakamoto, and in this white paper, Satoshi Nakamoto states that the financial crisis that took place was caused by the governments that provide the liquidity in the world and the banks that distribute this liquidity. It aims to eliminate incompetent governments and greedy banks and make transactions with the P2P (peer-to-peer) method through Bitcoin, the crypto money it describes in detail in the white paper. When you look at Satoshi Nakamoto and Nick Szabo, do you notice anything? When we take the counter a little further and bring it to 2014, Russian-born, gifted Vitalik Buterin, who immigrated to Canada due to financial difficulties, introduces to the world a smart contract software that works on the blockchain system as if it were an interpreter for Satoshi Nakamoto and Nick Szabo.

Blockchain Technology

The world crisis of 2008 destroyed trust in state currencies and those who control and manage them. Satoshi Nakamoto, in his post-crisis white paper, attributed the cause of the crisis to the greed of the financial institutions that manage the money and the callousness of the states that control the money. In the same whitepaper, Nakamoto introduced a cryptocurrency called Bitcoin, which is encrypted through blockchain technology, which we call crypto. That day Nakamoto formed the first link of the chain. Although it was not understood much at that time, this technology that Satoshi Nakamoto presented to the history of humanity will take the states at the center of our lives in the future and move us to a stateless, decentralized system, but how will this technology do it?

Although blockchain was only revealed as the technology behind a cryptocurrency when it was first announced, it has revealed its potential in the coming days. Technology makes users a part of the system rather than using the system because every transaction that takes place is the system itself. In the Bitcoin white paper, the indications are that the P2P method, i.e. peer-to-peer transaction, provides this opportunity. Currently, a person has to use an intermediary institution to transfer money, while the user of the system that transfers the money, the intermediary institution is the administrator of the system. Thanks to Bitcoin or other cryptocurrencies, blockchain technology removes the intermediary institutions, that is, the actors who manage the system, and allows the parties using the system to manage the system and transfer money, but how? The system actually consists entirely of numbers. The 16-digit number represents a block, the transactions of that block, that is, the data it contains. Now person A will normally go to a bank to transfer money, deposit his money in the bank, the bank or banks in between will make the transfer and the money will reach the recipient. In Blockchain technology, this process takes place through a 16-digit number sequence. Person A has Bitcoin and B wants to send it to himself, this Bitcoin owned by A is encrypted in this 16-digit string or strings. While A’s Bitcoin goes to B, there is no physical or virtual delivery, only this 16-digit string or strings change A’s Bitcoin to B’s Bitcoin. This process is called hashing and the chain is formed with all of these changes. These transactions take place on the blockchain, and after the hashing is completed and the consensus is achieved, the block added to that chain cannot be changed again. Consensus, on the other hand, is the approval of other actors in the chain, the chain is formed through our transactions, as I said at the beginning, and we keep it before every transaction takes place.

When Blockchain technology first came out, it was only created to fulfill the example I gave, Satoshi Nakamoto wanted to keep the actors of the centralized system out of the system with a decentralized system controlled by software, the crypto money that this system keeps track of, but the people who came after Nakamoto as if they were burning wood for this revolutionary fire he burned. they also decentralized other critical transactions using blockchain technology, another example of this is smart contracts, which is the subject of this article.

Smart Contracts and Ethereum

Smart contracts were first introduced in 1990 by Nick Szabo, a lawyer, and computer scientist. Nick Szabo came up with this protocol, arguing that traditional contracts can no longer meet the needs and are insufficient in today’s conditions, and he has always argued that the software is faster and more reliable. In the 90s, technology was not very advanced; Words such as computer, internet, and software had just begun to take place in our lives, so a computer program consisting entirely of a code and mutually managing the demands of the parties did not have the expected effect on people. Vitalik Buterin, who was only 20 years old living in Canada when the calendars showed 2014, Ethereum introduced a cryptocurrency called Ethereum that offered decentralized finance just like Bitcoin, but it wasn’t just its advanced technology that separated Ethereum from Bitcoin, because, unlike Bitcoin, it also offered a closed chain, apart from an open-chain system. In other words, in that white paper that day, the young genius presented another alternative to blockchain technology other than crypto money, apart from offering an alternative to Bitcoin, this alternative was smart contracts.

Nick Szabo always cited snack vending machines as an example when promoting smart contracts. The buyer makes a choice to buy wafers, as a result of this choice, he demands a fee through the software created with the smart contract protocol in the vending machine. As soon as the buyer transmits that fee from the machine hopper, the arm holding the wafer is released and the wafer reaches the buyer. This example is simplified, let’s go into some more detail.

Currently, smart contracts Vitalik Buterin is working on blockchain technology after introducing Ethereum. Each block can work faster, safer, and more advanced as if it were a contract. The system works entirely on the blockchain through cryptocurrencies. I want to explain the working method by combining it with NFTs. NFTs are another innovation developed over the technology of smart contracts. In this article, I don’t want to explain NFTs in detail, I just want to show them as an example and detail how smart contracts work, since they are built on the same technology, it is enough to know one another to understand each other. In our example, let’s have two people, one is a seriously successful digital artwork software developer and the other is a collector of these works. Our artist has prepared the pre-conquest state of Istanbul in 3D and wants to sell it. For this, the artwork is become a NFT in an NFT exchange by the artist. The artist uploads his work to the exchange’s website and connects his crypto wallet to the exchange, then the exchange NFT’s the work and mints it on the blockchain. After the Mint transaction, it forwards the passwords of the block to the wallet of the author. After the work is NFTized and minted, the auction starts online in the stock market. From the buyer’s wallet when the requested price is offered Ethereum goes to the seller’s wallet, and the NFTized artifact from the seller’s wallet goes to the buyer’s wallet, and the smart contract performs all these transfers. All details such as the price to be sold when creating the contract (the price has to be determined on Ethereum since this contract is minted on the Ethereum chain), how long the auction will last, can be processed into the algorithm and the contract can be minted in this way. NFT is only one area, smart contracts can be used and used in dozens of areas.

Areas Where Smart Contracts are Used

Smart contracts are now used for real estate sales and leases. It is used in many areas from financial data recording to derivative transactions. The system, which removes the central authority and banks in the sale of real estate, offers faster and safer service. More importantly, it eliminates the distances between them. There is a popular practice in the United States now. Landowners can rent their land to you wherever you are for certain periods, thanks to a smart contract, and with a single click. Or the real estate sales transaction made in the past years, a Ukrainian person sold his house to a European buyer through a smart contract. The seller and the buyer were able to carry out sales transactions in their own countries at the computer. One of the most essential issues for world trade right now is the supply chain. Even hourly disruptions cause billions of dollars in losses. In recent months, we have all seen that the disruption in the Suez Canal, the supply chain is of vital importance for world trade. As can be seen in the diagram below, the supply chain can be managed more quickly and securely thanks to smart contracts. Because all processes of the product from the factory to its delivery can be stored and managed on the chain.

*Smart Contracts: 12 use cases for business& beyond*

Or another area of use is vehicle insurance. Currently, it is not easy to monitor the system and many times the owner of the vehicle suffers losses because the system cannot be managed well because the police report does not reach the insurance company, the service reports do not reach the insurance company, or the insurance company does not make the payment on time even if all transactions are completed. The only reason for these problems I have mentioned is that there is more than one center and these centers cannot coordinate with each other. When the insurance company is doing a separate action and the law enforcement is doing a separate action, the system turns into an unmanageable situation that cannot be exited. As you can see in the diagram below, in the scenario where all these transactions are managed by a single code, that is, the smart contract, all transactions will be faster and more reliable.

Conclusion

Blockchain technology is growing like an avalanche. This technology, which was put forward for only one crypto money transaction at the time, offers us security, speed, and low costs by absorbing all our critical systems today. Today, data storage costs of central systems alone amount to billions of dollars. Although the purpose of this technology is to exclude the central authorities from the system, this is impossible, but after today, while such technology is there, central authorities cannot run this system as before, so the authorities should adopt and regulate this technology. If this technology is used under the control and regulation of central authorities, it will be more reliable and will be adopted more quickly.

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Smart Contracts and Usage Areas

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Written by Şaban İbrahim GÖKSAL