Variables in Smart Contract
By Raffaella Aghemo on ALTCOIN MAGAZINE
The Smart Contracts, conceived in 1996 by Nick Szabo, would seem to represent a quick and dynamic solution in many business fields, and serve in a context where several parties do not trust each other: they are self-executable software on a blockchain platform, with no possibility of default.
Their “automation” has the specific purpose of making easier and faster any kind of relationship, which could find its natural source in an obligation or in a regulatory case. An intelligent contract is a digital agreement that imposes itself. These “programs” use hash cryptography, made up of unidirectional mathematical algorithms (therefore not modifiable), which establishes their immodifiability and integrity. Computerized transaction protocols are defined that execute the terms of a contract, minimizing fraud, deception, exceptions or the need for intermediaries, and eliminating so-called transactional costs.
In the United States they are governed by ESIGN legislation (thanks to the ESIGN-Act and the UETA Uniform Electronic Transactions Act, electronic signatures have the same legal value as handwritten signatures), which equates them, in full, to a paper contract: the first state to introduce them was Arizona (House Bill 2417), followed by North Dakota, Tennessee, Wyoming, and Arkansas.
In the real world, unlike the digital world, the normative case, whether it is an obligation or a contract, has numerous variables, which not only find certainty in the compilation of the deed itself, as a guarantee of the parties, but which are also foreseen, or, in the absence, inserted and thought up by professionals of the sector. In the digital world, it can happen that the rapidity and automaticity of an instrument, such as an intelligent contract, have as a counterpart, the loss of malleability, or of modifiability, in the face of fortuitous or sudden circumstances.
It is, however, possible to insert, within the code, so-called trigger points, i.e. particular events, verifiable by computer systems, such as, for example, the expiry of a term, from which legal consequences will arise; precisely for this reason, in these circumstances we speak of “conditional contracts”, because the implementation of legal consequences occurs only as confirmation, either public or private, of the above conditions.
If the traditional contract is subject to the binding nature sanctioned by art. 1372 of the Italian Civil Code, which, however, can always be disregarded, and which will be remedied with sanctions and legal consequences, the smart contract, with contract automation, cannot be violated, since it is the code that forces the behaviour of the parties towards compliance with the clauses, “incorporating” in software and hardware a series of clauses to automate the obligations and make the risk of default almost null and void.
And so, what could happen in the case of an event that is decisive in the conditions of regulatory compliance, but which has not been foreseen and therefore written in code, within the program?
Smart contracts require oracles to resolve details, which cannot be known precisely at the time the contract is drawn up: third party agents who stand between the blockchain (and therefore smart contracts) and the real world, with the aim of passing information to smart contracts as soon as some external condition occurs. They then provide the blockchain with external data and trigger the execution of smart contracts as soon as a certain condition is met, which requires information not known at the time of writing the contract.
If the closure of the smart contracts to any external intervention is a guarantee of reliability, the problem remains, however, of all those elements, whether original or new, that do not reside in the chain, i.e. within the blockchain code, but must be “recalled” from the outside. The external world is precisely represented by an oracle, which, however, most of the time, being managed by centralized governance, is alterable; how do you reconcile the strict decentralization, unchangeability and transparency of the blockchain system with a source that is not as “reliable”?
It would seem that Chainlink has taken on the task of solving the problem of the deterministic nature of smart contracts, creating a series of nodes that have the specific responsibility of “certifying” the authenticity of the data that reaches the smart contract, precisely, regardless of the authenticity of the source, which should be drawn from. And how? By guaranteeing the nodes.
CHAINLINK is a decentralized oracle that connects blockchain and smart contracts with external data through a network of nodes. The security of the data provided is guaranteed because Smart Contracts can choose which and how many nodes they can focus on. Each node has a reputation, which serves to ensure that its work is being done correctly. The reputation of the nodes is proportional to the capital that each node must have, to guarantee the work done.
In fact, each knot must:
- pass a series of stress tests;
- must have a particular infrastructure and specific hardware and software security requirements, in order to be accepted as a valid node within the network;
- it must have a quantity of token deposited, which acts as a monetary guarantee for the work done.
The reputation grows if the work of the node has been done correctly, but decreases in case of errors. Let’s take a practical example in the insurance field.
In the case of a flight delay, the insurance reimbursement depends on an oracle, which communicates the exact time of landing of the plane; if the data transmitted is wrong, giving rise to a reimbursement that should not have taken place, the insurance company will proceed to claim on the node itself, which, therefore, will not only decrease the capital as a guarantee, but will lose in reputation, resulting “unreliable”, according to an effective rating system.
The process towards a digital and contractual automation is in continuous turmoil, a harbinger of solutions that can gradually resolve critical issues and facilitate access to innovation.
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Raffaella Aghemo, Lawyer