What are Smart contracts?

In 1996, Nick Szabo described a smart contract and gave the following definition:

“a set of promises, specified in digital form, including protocols within which the parties perform on these promises”.

Smart contracts found successfully their application into Ethereum, thanks to Vitalik Butterin and Gavin Wood (hard version: yellow paper, normal version: white paper, easy version: simple white paper).

Before that, people often forget that Bitcoin was the first to create smart contracts, encoded with a simple stack language.

What are the main properties of Smart contracts?

  • Autonomy: Once a smart contract is deployed, the initiator/author does not have to participate any more.
  • Decentralization: Smart contracts are distributed on multiple nodes.
  • Auto-sufficiency: they are able to realize the transactions (distribute or collect money) or any other actions coded.

Note that, once deployed, nobody can change a Smart contract.

We distinguish three use cases of Smart contracts:

  • The notarization smart contract: the basic one. All what you do is storing one or many hashes into a smart contract to generate a proof for something happening outside of the blockchain (for instance, you could store a hash of a contract to give it a certain date, without the need of a notary).
  • The smart contract, a way to execute legal contracts: the contract is signed outside of the Blockchain and parties would fulfil their obligation in the smart contract. For example, think of royalties’ payment, each party would get their revenue according to their share of the IP rights with smart contracts, according to a contract setting the provisions outside the Blockchain.
  • The smart contract, instrumentum of a legal contract: here, the contract is signed on the Blockchain, the smart contract becomes the instrument of the contract that you need to provide to the judge to enforce your rights. One of the barriers in Europe is the absence of recognition of signature as a valid signature onto the Blockchain for the moment. The advantage of this solution lies in the fact that it is fully decentralized, no one needs to keep an extract of the document.

An example:

Before digging any further into what a smart contract is, let’s have a look over a specimen.

Imagine someone wants to sell his car via Blockchain:

1- This very simple smart contract first needs to have a document outside of the Blockchain which would describe the car itself.

2- Hash this document and provide it on a public website.

3- Deploy the contract and provide the hash of the car document: your car is ready to be on sale on the Blockchain! You can use the function putOnSale and putOffSale when you want to sell it or not. You can decide, when you do not need any more of this smart contract to use the function destroyContract that will make your smart contract not available anymore.

4- If one wants to buy your car, he will only need to transfer enough cash to your contract, and he will own it.

Simple as that. You’ve just tokenized your car! Boom!

Note that Blockchain is blind to the outside world. And yet, someone can ask himself: how does the blockchain communicate with external data? The answer is called “The Oracle”. It’s basically a service that has to enter the external data into the blockchain. If you had a “call” to the external data, someone who wants to copy the blockchain might have different data (which is not what we want) because this data won’t be the same at the time the first consensus happened and when the blockchain is copied. Moreover, the external service provider could not exist anymore.

All right, you don’t understand what we’ve just talked about? It’s no problem. Just take a day, a week or even more and get through the whole documentation of solidity.

So now that you mastered the basic, let’s dig in how we can create a new society on smart contracts. Understand the Blockchain as a market. As you go to the grocery market, you have different goods and services that are made available.

On Blockchain, it is exactly the same. First, we’ve had all the Initial Coin Offerings. These are exactly like those sellers who want to spoil you. As we’ve discovered this new market, we wanted to buy everything, sure that it worth more. But eventually, we realize that this bad piece of art, remains a bad piece of art, (As bad Companies will do bad STOs). Now we are done with this, especially thanks to the Securities and Exchange Commission (the SEC) which requalifies token as securities and sues any of those that have not complied to the SEC rules.

The whole project is legendary in terms of costs efficiency, avoiding any kind of redundancy. Applied to finance, they can have great application.

For more information, please go to Equisafe.io!

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