Blockchain, the underlying technology that powers bitcoin, is one of the buzzwords of the past year. Practically everyone is talking about blockchain, and for good reason. Distributed ledgers, the term of art for blockchain's underlying technology, offer an exciting new way to transact business without a central authority. A blockchain is essentially a shared accounting ledger that uses cryptography and a network of computers to track assets and secure the ledger from tampering.

Because it is a decentralized system that exists between all permitted parties, there’s no need to pay intermediaries and it saves you time and conflict. Blockchains have their problems, but they are rated, undeniably, faster, cheaper, and more secure than traditional systems, which is why banks and governments are turning to them.

One of the most interesting applications of the Blockchain is the so-called SMART CONTRACT. The most common conception of a smart contract is a computer program stored on a blockchain. It is basically comparable to a vending machine. Normally, you would go to a professional (such as a layer or a notary) pay them and wait while you get the document. With smart contracts, you simply drop a bitcoin into the ledger, actually as it was a vending machine, and your escrow drops into your account. Moreover, smart contracts not only define the rules and penalties of the contracts, but also automatically enforce those obligations.

Using a smart contract, two people could create a system that withdraws funds from one person’s account—a parent’s, let’s say—and deposits them into a child’s account if and when the child’s balance falls below a certain level. Ant that’s just the simplest example. Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.

Example: smart contracts in Real Estate.

Suppose you want to rent an apartment from me. Ordinarily, I would have to pay a lawyer to write the contract, then we would meet to manually sign it, and then I would have to pay a Government Institution to register it and to store the original copy. Through the blockchain the entire process becomes much easier, faster and, most important, cheaper. You could pay your rent in cryptocurrency and get a receipt which is held in our virtual contract. I give you the digital entry key which comes to you by a specific date. If the key doesn’t come on time, the blockchain release a refund. If I send the key before the rental date, the function holds it releasing both the fee and key to you and me respectively when the date arrives. The system works on the If-then premise and is witnessed by hundreds of people, so you can expect a faultless delivery. If I give you the key, I am sure to be paid. If you send a certain amount of bitcoins you receive the key. Moreover, the document is automatically canceled after the time, and the code cannot be interfered by either of us without the other knowing since all participants are simultaneously alerted.

This new kind of contracts could turn into a cheaper solution both for the owner and the tenant. The first, in fact, would not have to pay the lawyer and the public institutions to hold a copy of the contract; and the latter would have fewer costs in terms of trust (the owner could, for example, ask a smaller amount of down payment as he is sure to be paid).

Advantages and Disadvantages.

Smart contracts are a newly born technology and for this reason they are still growing up and, by now, far from perfect. But in the end they still have lots of advantages, some of them are listed below:

• Autonomy: you are the one making the agreement, there is no need to rely on (and thus pay) a lawyer, a public institution or any other kind of intermediaries.
• Trust: your documents are encrypted and on a shared ledger. There is no way that someone can say they lost it. Furthermore, it functions as a multi-signature account, so that funds are spent only when a required percentage of people agree.
• Safety: Cryptography keeps your documents safe. There is no hacking. In fact, it would take an abnormally smart hacker to crack the code.
• Speed: You would normally have to spend lots of time on paperwork, smart contracts use software code to automate tasks saving hours to the process.
• Saving: since you do not need to pay any intermediate and you need a small amount of time, smart contracts save you lots of money.
• Accuracy: As automated contracts, they are not only faster and cheaper, but also avoid the human errors derived from manually filling out the documents.

As I said there are also several disadvantages that come along with smart contracts. You could, for example, get a bug in the code, or send the wrong code, or send the right code but your apartment is condemned before the rental date arrives. Moreover, some governments still do not have any regulation or taxation process for this kind of contracts.

The list of challenges goes on and on. Experts are trying to unravel them but these critical issues do dissuade potential adopters from signing on. I personally think that, given the advantages of a smart contract (especially its cheaper price), it is normal to have some kind of risk that comes with it. Beyond this, Smart contracts remain a really useful innovation that has a huge potential in all kind of applications.

Where are smart contracts processed?

Finally, I want to talk about some technical aspects of this contract and its relationship with the blockchain.

The first word that comes to our mind after blockchain is, for sure, Bitcoin. Actually, the two were born together and Bitcoin blockchain was the first to support really basic smart contracts, in the sense that the network can transfer value from one person to another.

But Bitcoin is limited to the currency use case. By contrast, what fits best the anatomy of smart contracts is Ethereum blockchain, because it replaces the bitcoin’s restrictive language with a language that allows developers to write their own programs. and thus their own smart contracts.

The structure of Ethereum blockchain is very similar to the Bitcoin one, in the sense that it is a shared record of the entire transaction history, and every node owns a copy of it.

The big difference with Ethereum is that its nodes store the most recent state of each smart contract, in addition to all of the eth transactions. Bitcoins, on the contrary, uses unspent transaction outputs to track who ha show much bitcoins.

Let’s look at a basic example, Every time a bitcoin transaction is made the network “breaks” the total amount as it was paper money issuing back bitcoins in a way that makes the data behave similarly to the physical coins or change. To make future transactions, the bitcoin network must add up all your pieces of change, which are classed as either “spent” or “unspent”, to know if you actually own the amount of money you are pretending to spend.

Ethereum, on the other hand, uses accounts. Like bank account funds, ethereum tokens appear in a wallet and can be ported to another account. Funds, thus, are always somewhere, and you do not have what you might call a “continued relationship”.

Giusy Beatrice Colarusso