Who Uses Smart Contracts and
Why Are They Better Than Traditional Ones
The central bank of Argentina, together with large commercial banks, began testing a new clearing system based on a network of smart contracts. It will help speed up the calculations.
The solution runs on a managed blockchain. The blockchain system will process direct debit transactions in which the payment is initiated not by the sender, but by the recipient of the funds. The platform will allow tracking claims between participants thanks to a decentralized corporate network - this will facilitate messaging and make the process transparent.
In addition to the Central Bank of Argentina, the system is being tested by financial institutions, clearing companies and leading commercial banks. The regulator and the development company are confident that the smart contract audit companies network can become the basis for an alternative clearing system.
In world practice, smart contracts are used not only in the financial market, including banking and insurance, but also in government, retail, healthcare, in the initial placement of tokens (ICO), and so on.
According to Dune Analytics, the number of new smart contracts on the Ethereum network in March reached almost 2 million - a record 75% more than in February. The growth is taking place against the background of a decrease in the cost of placing a smart contract: now, on average, about 11,600 dollars are needed to issue it. This is due to the scaling of the technology and the implementation of Ethereum 2.0 (Ethereum 2.0 Topaz testnet was launched in April). It should be a decentralized blockchain platform that supports thousands of transactions per second, which is cheap to process and does not require huge energy costs.
What are smart contracts?
For the first time, the idea of a smart contract was proposed by Nick Szabo, an American scientist in the field of computer science, cryptography and law in the 90s. He described a smart contract as a digital representation of a set of obligations between parties, including a protocol for fulfilling those obligations.
Smart contracts are used to carry out various operations on the blockchain. These are computer algorithms that automatically control and verify the recording of data and ensure the fulfillment of the obligations assumed by the parties to the contract. In this case, all the terms of the transaction must be formalized and translated into the appropriate program code. Automatic execution of smart contracts using distributed ledger technology can reduce the financial, administrative and time costs of participants when concluding and fulfilling the terms of the transaction.
Often, the fulfillment of the terms of a smart contract depends on information that is located in third-party information systems - outside the distributed ledger system, where smart contracts themselves are recorded and stored. To obtain data from external sources, intermediary services - "oracles" are used. For example, an oracle can provide exchange data on the exchange rates of securities and currencies to execute the logic of a smart contract for the movement of assets between members of the trusted network or track the fact and date of delivery of the cargo for further payment to the counterparty or the introduction of sanctions for default.
The creation and subsequent execution of a smart contract, as a rule, proceeds according to a certain scheme:
- Coordination and consolidation of the terms of the transaction between the participants, conclusion / creation of a smart contract;
- Connecting a smart contract to internal systems (systems of banks, financial or other organizations) and external systems - oracles;
- Expectation of the events described in the contract and the assessment by the smart contract of its status at a certain point in time (to what extent both parties have fulfilled certain conditions);
- Self-execution of the smart contract when the participants fulfill the established requirements.
There are several types of smart contracts in terms of the execution of agreements:
- Control over property relations - ownership and operations with digital assets (including cryptocurrencies and tokens);
- Financial services - trading on the stock exchange, participation in auctions, trade financing, etc. (large platforms allow banking transactions on the blockchain);
- Loan obligations - execution of agreements on various forms of bank loan products (for example, the Masterchain platform provides accounting and storage of mortgage bonds in a decentralized depository system);
- Social services - insurance processes, voting and election procedures (for example, elections using the Polys blockchain platform in Saratov, electronic elections to the Moscow City Duma and the Moscow polling system "Active Citizen");
- Management of the delivery and storage of goods (for example, the Dixy network has established communication with suppliers using the blockchain).
One of the most promising applications for smart contracts is the automation of the provision of banking services, such as supply chain financing, mortgage lending and small business lending. Smart contracts will automate payments and reduce uncertainty and credit risks.
The use of smart contracts gives users a number of advantages at once.
- Firstly, it is the transparency of the contract: the parties to the transaction can control its execution at all stages and make sure that the counterparty has fulfilled its part of the contract.
- Second, a smart contract provides for enforcement mechanisms, such as fines and sanctions.
- Another advantage of smart contracts is their verifiability, which allows you to determine the participants and the sequence of their actions, forming an audit trail. Also, the value of smart contracts in the security of their conditions and data from third parties. The privacy of a smart contract insulates it from external influences, and liability is limited to the parties to the transaction.
But, despite all the advantages, working with smart contracts has its own difficulties associated with technical features, as well as the relative youth of the technology. Let's take a look at the main one.
Automatic execution of a smart contract. On the one hand, this is an obvious plus. But in the world of living people and objective factors affecting business processes, the same item can receive a minus sign. It is impossible to "negotiate" with a smart contract. In case of automatic self-execution, he will not take into account arguments about a shortage of goods, a flood or everyday troubles, and a fine will inevitably follow for violation of the terms of the transaction.
A wary attitude to the new technology on the part of traditional, heavy-handed enterprises, accustomed to working in the old-fashioned way. Such a counterparty may refuse to conclude a deal in a new way or, since he is used to constant postponements, will violate the regulations established by the smart contract.
So far, in the world legislative practice, there is no officially fixed status of a smart contract. In some cases, this can make it difficult to resolve disputes in case of violation of the terms of the transaction. In addition, the question of jurisdiction to resolve such issues remains open. Among other things, smart contracts are concluded within the framework of cross-border relations - and here difficulties may arise in the field of substantive and procedural law.