+44 (0) 1481 710043

Smart Contracts, Ethereum and the Block Chain

Share

Smart contracts are going to revolutionise the way in which business is transacted in the online world, key in promoting efficiency and cost reduction in the way business gets done.

Smart contracts are going to revolutionise the way in which business is transacted in the online world, key in promoting efficiency and cost reduction in the way business gets done. The change is akin to the leap from the early days of the web to web 2.0 where rich multimedia and video along with client-side applications and rich services allowed us to move from the web as an informational resource supporting a few transactions to the rich multimedia and ecommerce environment we have now.

Indeed, smart contracts based on Ethereum and the block chain that underpins them are being described by pundits in the industry as web 3.0 and this is being developed by the likes of Microsoft and JP Morgan. In fact, all the big boys in the industry are all getting behind this radical new paradigm.

So, what does this mean for me, why am I interested, what can it do and what can I use in this quite admittedly highly technical subject area?

The first part to understand is that it is still early days. This technology is new, and the use cases are still evolving but smart contracts allow frictionless trade and massive cost reduction for businesses that successfully utilise them as well as the myriad of potentially new business ideas being developed. The terminology may be new to you, so things like the block chain and the fact that this is a distributed accounting ledger that everyone can add to, needs to be understood. I will attempt to give an overview below however I recommend further reading if this perks your interest.

Smart contracts are in effect a mini-contract or several mini-contracts written in a standardised way to disburse a resource, most often the crypto currency Ethereum, but real estate and other tokens have also been demonstrated like airmiles and vouchers.

The contract allows an impartial agreed upon set of actions to take place which is then added to every other computer on the network of computers that run Ethereum. This public ledger ensures that the contract itself is not modified, is executed correctly and that any Ethereum (digital cash) is moved to the correct account. The Ethereum balance itself is on the same ledger and is checked by the network. To run the contracts and use the network you must pay a small fee called gas which is a minute amount of Ethereum to run the contracted program.

The beauty of this system is that the smart contract is a mini program that can check and verify the results of an action. It can in effect be a digital trust / escrow or an insurance service, and where a digital source exists, use this to verify the contract has been executed and in most cases, move payment from the contracts account to the recipient account automatically without human intervention. These contracts are also contracts in the legal sense in that authorities in many countries are writing into the law books the validity of a contract written in code. This can be cheaper and faster, as it’s fully automated, and as its automated it can be scaled massively for minimal cost.

Let’s give an example:

A few years ago, I purchased for Sure, the domain name Sure.com which was valued at quite a lot of money.  To purchase the domain, I had a couple of options:  

I could contact the owner establish a price and then, based on the agreed transaction amount, decide to take some risk and trust the other seller to do the right thing, when I sent the money for the domain, by transferring it over to me.

Alternatively, if Sure had bought it they would have to pay a lot of money and go through a long process using an Escrow firm to take hold of the cash, agree conditions of sale and then pay the 3rd party. If the domain was transferred, we needed a third party to do the checks and then disburse the cash, if not they would take their fee and return the money to me.

This was expensive, time consuming and slow. It relied on human agents to check and verify the steps and could only take place in business hours which was difficult due to the time zone differences. Typically, charges are in the range of 100’s of pounds.

Now picture the same transaction using the block chain and Ethereum:

I find the owner and agree a price, we also agree on the conditions of sale. We, not being developers, pay a small fee for the Ethereum contract to be written, buy a template or in the future when the software is better you will be able to create it yourself. The contract contains the simple logic to either make the sale or reverse the sale and judges the results. The buyer puts in the money and pays the small fee to send the contract to the public Ethereum ledger, the contract code, the fee is minimal couple of pence and contract is active 24/7 running on all network nodes. The domain provider can log on and check the code in the contract is correct and that it transfers the money to his account once domain ownership changes, the buyer writes it so that the contract checks at the domain registry for a change of owner to himself or returns the money.

The second the domain is sent to the new owner; the contract is activated, and the payment sent to the domain provider. If any other scenario takes place between the creation and expiry date of the smart contract the buyers money is returned, less a tiny fee. No human monitoring takes place, the transaction is instant, and the results are instant. It is cheap and efficient and infallible.

As you can see it would have probably cost pennies If I had written this myself or I could have bought a template for around £20 or used a developer to write such a contract. There is also no need for trust between parties as it removes the risk for smaller transactions that can’t afford the escrow route.

Another example would be insurance that automatically pays out if your car is written off by an accident once it is recorded by the police. I can think of many more examples.

This means that in the future, business will be 24/7, the costs will be cheaper and the results instant. This has huge potential and I’m sure you can think of situations in your business where this could help. The rule generally is if it can be monitored in a digital way you can build a contract around it.

Back To Resources

StartUp Newsletter

Sign up here for latest news, information and developments

Submitting the form will open a new window.
Ensure popups are enabled from this site.