Disruptive potential of ‘Smart Contracts’ on Blockchain
Did you know that Bitcoin transactions are actually ‘Smart Contracts’?
As I have already discussed how blockchain works and why it will radically transform the way we exchange money, data and assets in my blog post ‘Blockchain — a weapon of mass innovation’, I thought I should tackle ‘Smart Contracts’ in this one.
Simply put, a smart contract is a computer program that automatically executes the terms of a contract and has property ownership information embedded — thereby solving the problem of counterparty trust at the same time. This is what makes smart contracts efficient, cost-effective and transparent.
To bring it home, I have selected Slock.it, a German startup as an example. They created a smart, safe and secure digital lock that will soon allow anyone to rent, sell or share anything that can be locked — without a middleman. Slock.it does it by utilising smart contracts on the Ethereum blockchain to enable connection between the digital and physical world.
Here is a link to Slock.it’s demonstration at the London Ethereum Developer Conference last November. It is 20 minutes long but well worth watching since it shows how Slock.it intends to decentralise our fast growing sharing economy: think of sharing apartments, bikes, cars, washing machines, lawn mowers, parking spaces, even electricity — and anything else you own but do not use to its full capacity.
Obviously, first you would have to retrofit your apartment door, power tool, power outlet or bike, for instance, with a Slock. As I have already mentioned, the digital locking system is controlled by a smart contract. You, as the owner, have to enter only two numbers: the deposit and the rental cost. There is absolutely nothing else you need to do.
The user, on the other hand, pays the deposit. Once the deposit has been received by the lock, the user is granted permission to open and close it as often as he wants to by using his smartphone. A user management system has also been included in the smart contract, which means that the current user can set up other sub-users, such as family members.
Upon the contract expiry, the user gets back the deposit minus the cost of rental, which is then transferred to you, the owner of the Slock. The whole process is completely automated. By the way, insurance will also be included in Slock.it’s smart contract.
Slock.it has built two products so far: Slock Home Server and Slock Power Switch. The former is designed to control all smart devices in your home (in case you already own them), while the latter is cheaper and is used to control a single device. Both products make connection with smart contracts on the Ethereum blockchain via a tiny imbedded Intel Edison.
Slock.it is currently in the process of partnering up with other companies to manufacture a smart door lock, a smart bike lock, a smart padlock and a smart car lock.
In the real life demo I have linked to above, you can actually see how quick and straightforward it is to go through the whole process by using Slock.it’s smartphone app. Besides, it is easy to grasp how the Slock.it’s smart contract works in practice. All the rules are built into the smart contract. The connection with the Ethereum blockchain is made only twice: when renting an item and when returning it. This is when the miners have to confirm the transaction. In the meantime, locking and unlocking of the rented item is controlled via Whisper messages (which are part of the Ethereum P2P protocol suite and totally free).
In the demo you will also find out more about Slock.it’s ambitious plan for the future regarding the sharing economy and the Internet of Things (IoT). The company is the first one to connect and control various IoT devices via the Ethereum blockchain by using the Ethereum computer they are building at the moment — a very exciting project that will definitely uncover new insights and use cases!
There is another interesting thing about Slock.it. They plan to raise the money by crowdfunding — which is to be announced shortly! Follow the link if you wish to be notified of the date! (I have already signed up.)
However, they are doing it pretty unconventionally — by establishing a Decentralized Autonomous Organization (DAO). According to Wikipedia, DAO is a ‘company run without any human involvement under the control of an incorruptible set of business rules’. Of course, this DAO will have a smart contract, that is, its Constitution on the Ethereum blockchain. You and I will be able to buy ‘shares’ in the crowdfunding presale and get ‘dividends’ if the business is profitable. This will also happen automatically since it will be built into the smart contract.
If you decide to invest in the DAO, you will have to use the Ether cryptocurrency. In return, you will get Slock tokens that will represent your membership in the DAO. The DAO will be in charge of the funds and the development. You, as a member, will be able to vote on all major decisions.
Slock.it, on the other hand, will be the first service provider responsible for producing the slocks, the marketing and the partnerships with the hardware manufacturers. Naturally, the DAO will assign tasks to the service provider via smart contracts.
And, how will this for-profit DAO make money? By getting a certain percentage of each transaction as a fee. The DAO members will vote on it.
If your interest has been stirred up, definitely check Slock.it’s ‘In-depth’ page to learn more about the whole project.
Now that you understand the concept of smart contracts, it is easy to see how they can be used for all types of value transactions. Apart from the fact that they are so much more efficient and cheaper due to automation, they will also be capable of debugging themselves in the future thanks to advancements in machine learning algorithms. For instance, they will be able to flag inconsistencies in very complex contracts that might otherwise go unnoticed. It is anticipated that savings in time and money gained by using smart contracts and blockchain, especially within the financial and securities sectors, will be huge.
In November 2015, Euromoney announced in their post: ‘Getting to grips with blockchain’ that markets from private equity and syndicated loans to corporate bonds and derivatives might go on private blockchains within months.
In the article, Mark Smith, cofounded and CEO of Symbiont, a fintech company, revealed that in the first quarter of 2016 the company would turn syndicated loans and corporate bonds into smart contracts on their permissioned shared ledger for their clients.
Smith further explained that syndicated loans were a $4 trillion market still running on faxes, emails and excel spread sheets, and that by turning them into smart contracts the whole process from originating to completing a syndicated loan could come down from 27 days on average to 2–3 days. This is because the terms and conditions of the loans, including payment features, are preprogrammed and embedded algorithmically in a smart contract issued from the borrower to a syndicate of lenders across a shared ledger.
No wonder then that Smith thinks this will change the syndicated loan market significantly by the end of 2016.
The company will also, together with one of the leading investment banks, do the first $100 million corporate bond issuance for a Fortune 100 company as a smart security on their permissioned shared ledger in the first quarter of this year.
By now, I hope you can see how use of smart contracts by banks will reduce operating costs, fully automate the management of financial instruments throughout their life cycle, and reduce settlement times as well as capital consumption.
This is why Smith considers smart contracts to be the killer app for the blockchain and thinks that their adoption will be a lot faster than people expect.
