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What are smart contracts, and what might they be able to do for you?
Just when you start to understand the idea of cryptocurrency systems such as Bitcoin, along come smart contracts. A world that started with the digitization of money to evade online counterfeiting is now writing business transactions into code. The core functions of mobility, from real estate to shipping, fall into that wheelhouse, making the imminent use of smart contracts for everyday business dealings a distinct possibility.
“Now that money’s uncopiable, why can’t assets around us be digitized?” says Rohit Tandon, founder and CEO of Chainworks, a New York–based enterprise blockchain consultancy. “In future, all these digital assets are going to streamline connections between digital assets.”
Natalia Karayaneva, founder and CEO of Propy, a global firm facilitating real estate purchases via blockchain-based smart contracts, sees the use of blockchain and the smart contracts built on it accelerating into “real-life use cases.”
Propy had a real estate transaction in Spain where a smart contract was used as an escrow to facilitate the transaction. We believe that in the coming years we are going to see more use cases like this in different verticals, especially real estate.
Natalia Karayaneva, Propy founder and CEO
Natalia Karayaneva, Propy founder and CEO
Blockchain and Smart Contracts 101
To understand smart contracts, it’s necessary to understand blockchain first. Don’t panic. While the technology whirring away in the background is beyond comprehension by all but a few Big Bang Theory characters, its name neatly encapsulates the concept. Blockchain is a chain of blocks. Each block is built with data entered by players on that chain. When enough data is collected to constitute a block, that block gets an immutable identification number. Then it connects to the next block, or brick, being created.
“Every time a new brick is made, the state of the brick is memorialized,” says Tandon. “The next brick you lay will point to the previous brick.” The data in each block is verified, not by humans, but by all the computers tapped into the network.
“With every new block, the network looks to make sure no one’s trying to manipulate it,” says Andrew Hacker, cybersecurity expert in residence at Harrisburg University of Science and Technology and CEO and founder of Thought, an artificial-intelligence (AI) blockchain startup. “In a public blockchain, every other computer that processes it can see what’s in there.” At heart, blockchain is “a type of database, but it has some unique qualities,” says Tandon. “It can be centralized or decentralized. It can be distributed or not. Distribution ensures that all participating companies have a copy of the database.”
Smart contracts are “an innovation on top of blockchain,” allowing execution of agreements “between party A and party B, as opposed to just sending bitcoin back and forth,” says Hacker. It’s a usage being made possible by blockchain’s status as a self-managing ledger. When parties agree to a transaction, the terms are written as code. As each term is fulfilled, the smart contract automatically triggers the next term.
A frequently cited example of smart contracts in action is well known in the mobility world. It’s an apartment rental, transacted between landlord and prospective tenant. When the tenant pays the rent, the smart contract automatically releases the key code.
Among several use cases currently in play, smart contracts can streamline multiparty agreements, says Tandon. “You’ve created a common record for a common business process,” he says. “Where’s the business logic? That’s what smart contracts are. You encapsulate the business logic atop the blockchain to execute autonomously.”
Hacker agrees that blockchain can be ideal for relocation businesses. “Say there are six companies—movers, insurance, real estate, and others,” he says. “If they all agree to use the platform and format, it can definitely speed things up. Anywhere there are many different organizations, putting that contract in digital form cuts out a lot of paperwork and legal fees.”
Most businesses dipping their toes into blockchain seek cost reductions and organizational efficiency, notes Tandon (while the next question—that of monetization—remains largely untapped). Making the determination requires scrutiny of current business processes, to determine the time and cost wasted on the back-and-forth of regular transactions. A blockchain-based shared ledger with suppliers creates transparency, and “payments become immediate or real-time.”
Just like any software, blockchain technology can be open-sourced or proprietary. Today’s dominant open-source blockchain service is Microsoft’s Ethereum, but there are many others. Using such open-source blockchain capabilities, businesses can create their own networks that outside entities can’t access.
Typically, a blockchain or smart-contract development team is multidisciplinary, convening blockchain expertise with industry and legal knowledge. “It’s like any large solution-based design project,” says Hacker. “You’re going to need the experts in the right places to tie it all together.”
Blockchain’s dependence on cryptocurrencies is not considered an obstacle to adopting smart contracts. While there’s no way—yet—to conduct transactions solely in dollars or other traditional currencies, a range of online services offers the ability to exchange U.S. dollars and other currencies into cryptocurrency.
In the mobility sector, smart contracts are suitable for such transactions as real estate because they allow them “to be more seamless and time-efficient,” says Karayaneva.
Related: See Blockchain and Real Estate Conveyancing
As with any new technology, blockchain and smart contracts need time to win acceptance and overcome hurdles. Hacker points to the large price swings and volatility of cryptocurrency as a barrier to the uptake of blockchain technology for financial transactions and smart contracts. Perhaps the most problematic barrier to smart-contract uptake, however, is scalability. Of all the financial transaction systems available, including credit card networks, Bitcoin is the slowest in transactions per second, says Hacker.
While blockchain is eliminating centralized ownership of processes and transactions, the biggest challenge Tandon has seen is “bringing humans together to agree on the consortiums and build a common blockchain and infrastructure for all the companies that trade a certain thing.” Blockchain, he notes, “is a team sport, and bringing the team together is the biggest hurdle.”
Hacker sees takeup of blockchain and smart contracts accelerating. “You can’t use blockchain for everything. It doesn’t solve all problems, but it is a very powerful technology whose acceptance and maturity will continue to grow.”
The above information is excerpted from an article that appears in the August 2019 issue of Mobility magazine. Read the full article.
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