contracts

The concept of smart contracts as defined by Nick Szabo in his article “Formalizing and Securing Relationships on Public Networks” was developed with the aim to facilitate trading and avoid disputes between traders thanks to a technological legal framework:

“A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives are to satisfy common contractual conditions (such as payment terms, liens, confidentiality and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs.”

In other words, a smart contract is a self-enforcing computing programme distributed amongst a network of ledgers that translates contractual agreements, expressed with conditional instructions: if such parameter is verified, then and only then can the value contained in the smart contract be unlocked and the transaction occur as a consequence. The concept gained vivid interest with the development of the blockchain technology, as a blockchain could become a storage facility for smart contracts and thus represent an answer to the eventuality that one of the interested parties could deny the existence and/or the content of the contract (Idelberger et al. 2016).

Once hosted on a blockchain, a smart contract has a timestamp and cannot be changed, unless any update is validated by the miners of the blockchain. The distributed ledger, for instance the Bitcoin blockchain, records the execution of the contract when triggered by a new transaction related to this very same contract (supplied for by the users or extracted from a given environment) and checks compliance with the content of the smart contract while mining the blocks (Christidis and Devetsikiotis, 2016). Thus, since none of the committed parties has a hold on the execution of the programmed contract, neither of them can contest it and the need for trust between them becomes dispensable. Plus, the blockchain offers an increased transparency, as anyone on the blockchain has access to it, while still respecting the privacy of the parties in the meantime (Huckle et al. 2016). Given these valuable assets, smart contracts become more and more promoted as a tool to ensure efficiency, security and impartiality while also reducing the costs of implementing an agreement.

III. THE ETHEREUM PROJECT

Ethereum is a platform based on a public blockchain that runs smart contracts thanks to the Ethereum Virtual Machine and a language named Solidity. Thus, using Solidity, developers can write smart contracts for any kind of purposes. It was created by Vitalik Buterin, a Russo-Canadian cryptocurrency researcher and programmer now president of the Ethereum Foundation, also involved in Bitcoin, in 2013, after a crowdfunding campaign that helped him raise over 18 million dollars. According to its creator, while bitcoin only consists in trading coins, Ethereum aims at creating all kinds of applications (Les Echos, 2016).

The execution of a smart contract is enabled by miners who, in exchange for their mining activities, need incentives. Ethereum has therefore created a bitcoin-like cryptocurrency, called Ether. Every miner is free to indicate the price for which he would agree to mine a contract. If the user refuses to pay as much as required, the execution of his contract will take much longer, as lucrative transactions are mined first. However, Ethereum is built so that every smart contract is public because stored on every node of the blockchain. This tends to slow down the processing of the contracts, since every node engages in calculating every smart contract. Current development of the platform works on sharding (i.e. partitioning horizontally) the calculations required for the monitoring of the smart contracts.

Ethereum has now given birth to over 300 “Dapps” (short for “Decentralised applications”), all registered on www.dapps.ethercasts.com, whose combination of decentralised applications and self-executing smart contracts cover various projects related to finance, prediction markets, insurance, social networks, Internet of Things (IoT), distributed computation and storage, gambling, marketplace, governance, collaboration, development and games, etc. Ethereum not only attracts start-ups but also big companies like Deloitte and ConsenSys, for instance, who plan to create a private blockchain with other banks, in order to set up a new digital bank.

However, Ethereum has also been criticized for being far more complex than bitcoin, thus enduring more security issues, as this has been observed with The DAO attack in June 2016 (The New York Times, 2016). Bedeho Mender from Joy Stream, for instance, declares (CoinFox.Info, 2016) :
“Things like “no middlemen” and “decentralization” are not actual end user benefits, they only potentially generate benefits indirectly. Perhaps even more so than in the Bitcoin space, using the Ethereum platform seems to be a decisive end-goal for people in Ethereum projects, rather than providing a better solution to a real world problem. [...] The best case scenario for most of these projects is that there are end user benefits for other reasons and that Ethereum is not required to deliver them. The complexity and cost of doing blockchain based products will in such cases eventually drive such products off chain…”

To him, Ethereum projects are likely to fail because they add much complexity and costs to provide only minor improvements. However, this view is mitigated by others like Olpinski (CoinFox.Info, 2016), a blockchain researcher and consultant, who perceives Ethereum not as a way to create applications, but as a platform to foster a new architecture for economic interactions.

Ethereum is not the only platform hosting smart contracts – even though it seems to be the most used by developers (Les Echos, 2016) - other blockchains can be used: for instance, Rootstock is a project that aims at implementing smart contracts on the Bitcoin blockchain for diverse applications such as escrow services, Internet gambling, micro-lending, intellectual property registry, voting systems, digital identity systems, supply-chain traceability or online reputation systems. As for the RSK platform, it also uses the Bitcoin platform for its smart contracts, thanks to a token that is attached to bitcoin and can be exchanged for, and claims that it thus combines the security provided by the bitcoin system with the flexibility of Ethereum.

Smart contracts have been used for a large variety of applications. Those seem so far mostly related to insurances, the Internet of Things (IoT), collaborative economy and new types of organizations, i.e. Decentralized Autonomous Organizations (DAOs).

- Smart contracts for insurances

Wekeep.io is a French project that operates as an insurance system, without having to rely on an intermediary party. The concept lies in the registration of all transactions in a distributed ledger whose users decide between them if a reimbursement can occur. Such reimbursement therefore requires a multisignature to be operated. There is no single owner, the whole group is responsible for the insurance fund. Wekeep.io applies so far to travelling: passengers who have encountered delays during their journeys obtain an automatic indemnitee to compensate for this inconvenience. This prevents the passengers from having to fill in forms and the company from having to sort out those very same forms.

As for Allianz Risk Transfer and Nephila, they use the blockchain and smart contracts along a similar reasoning, to automate payments linked to “cat bonds”, without human intervention: once a catastrophe occurs and presents the criteria defined in the contract, the smart contract automatically proceeds to the payment. Transactions are deemed to be secure and unfalsifiable, and much faster (L’Argus de l’assurance, 2016).

- Smart contracts and the Internet of Things

The energy sector has created a few systems based on smart contracts and blockchain in the interest of developing the IoT. For instance, TransActive Grid currently implements a peer-to-peer market of renewable energy in Brooklyn (NYC), where solar panels sell their excess output to neighbouring parties, automatically and according to criteria defined by the users. Similar projects also emerge for instance in France, where Bouygues is about to develop a blockchain for smart grids in Lyon.

- Smart contracts and collaborative economy

Smart contracts have been used to ease exchanges of services and sharing of property (see Christidis and Devetsikiotis, 2016) and could represent a judicious answer to the stakes addressed by collaborative economy (La Tribune, 2016). Slock.it, for instance, is a project that works on developing “smart electronic locks” (hence the name “Slock”) that can be unlocked by devices having the proper token, obtained from the Ethereum blockchain. Such locks allow users to rent their house or their car to another user for a given period of time in exchange for Ethers, each transaction being recorded on the blockchain. Stephan Tual, one of the cofounder of Slock.It explains that “everything is automatic and secured, from the opening of the front door to the rental payment” (Le Monde). Another startup named La’Zooz, based in Israel, has developed in 2015 the very first decentralized car-pooling application thanks to smart contracts and the blockchain technology. This system offers the same services as Airbnb and Uber, although without having to depend on any of those two third parties.

- Smart contracts and Decentralised Autonomous Organizations

DAOs represent a new type of organizations whose members and bylaws are ruled by smart contracts on the long term. Thus, smart contracts help building the architecture of such autonomous e-communities that have decentralized governance and where members can collectively decide on how their organization should allocate funds (e.g. to pay salaries). In this case, the blockchain technology and smart contracts can help achieving non-repudiation and track consensual agreements and votes. Smart contracts check if interactions between members follow the rules members initially agreed upon and act as a mediator between the participants, coordinating the execution of a collaborative process, while the blockchain serves as a secured data storage that can be used as an audit trail to check any transaction and the detail of its voting process (Norta, 2016).

DAOs are interesting in the sense where they alleviate the need to rely on trusted managers and CFOs and drastically reduce the quantity of board meetings and paperwork usually required in a private company for example. As promoted by Ethereum, “one of the many advantages of having a robot run your organization is that it is immune to any outside influence as it is guaranteed to execute only what it was programmed to do” (Ethereum.org). They enable new models that were seen as non-executable or too costly before, such as decentralized investment funding, decentralized prediction market platform as done by Augur, etc. (see newsbtc.com). The most famous application of DAOs is The DAO, an investor-directed venture capital fund with no board of directors or any fiat management structure and not attached to any particular state, which aroused many regulatory questions (The Economist, 2016).

And so much more to come...
Other examples of applications are numerous. The case of Ujo MUSIC is another well-known application of smart contracts. This music platform uses smart contracts and the blockchain technology to describe and enforce the terms under which a song may be downloaded. It also ensures the automation of payments so that artists receive their royalties instantly, instead of having to wait for months in the fiat system. Plus, once a song is streamed, this transaction is recorded permanently, which offers valuable data sets usable for other purposes. Such project could easily be expanded to any digital asset distribution system and thus have dramatic implications for electronic media (Huckle et al. 2016).

IV. EXAMPLES OF APPLICATIONS AND PROJECTS BASED ON SMART CONTRACTS

Given its self-enforcing and deterministic character, it is obviously essential that the smart contract describes every option and outcome of the contract. Thus, most of the limits identified for Bitcoin also apply to smart contracts: it is difficult to reverse the process once implemented, updates are complicated as no single entity can decide for it, transactions can be slow, developers have enormous responsibilities, the legal status of smart contracts is yet unclear, responsibility is difficult to attribute to a specific actor, etc. (Christidis and Devetsikiotis, 2016 and La Recherche, 2016). Its automated aspect also raises ethical issues as it paradoxically limits liberties: it is not possible to refuse to follow a rule, there is no notion of exception permitted (Le Monde, 2016).

Idelberger et al. (2016) argue that combining procedural languages (where developers write what is to be done and how to achieve it) and logic-based languages (where on the contrary, the programmer only describes what is to be done, but not the path to be followed to do it) could be helpful to ameliorate smart contracts. The latter would notably become easier to understand for jurists and have at the same time technical advantages interesting for developers. For the moment, only procedural languages are being used, as it is the case for Ethereum’s language Solidity, and the authors outline the lack of consideration for other options. To them, a hybrid approach could further reduce the gap between smart contracts and fiat contracts.

Smart contracts, just like bitcoin, arise many legal questions. Indeed, a smart contract merely consists in software that has no legal enforcing power as such. To address this issue, the CommonAccord project has been launched, in order to result in legal smart contracts. The project promotes the decentralization of the writing of legal documents in order to foster users’ autonomy by collaboratively creating a global inventory offering a library of standard legal tools, clauses and other groundings for civil law, so that users can dispense with lawyers. Legal Markdown is another tool that intent on matching fiat contracts and corresponding smart contracts.

V. LIMITS AND PERSPECTIVES RELATIVELY TO SMART CONTRACTS

Credits:
Juliette KON KAM KING

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