This week marks the first of a three-part Blockchain-related insight series by our very own entrepreneur-in-training, Adriel, as he shares with us the challenges and lessons gleaned from his time in the VB18 programme.
This week, he will focus on the concept of “Smart Contracts”.
Essentially, a smart contract is a self-enforcing agreement, formalised as a software. In a smart contract, there are rules that are coded into the contract that dictate a certain agreement. Once the parties involved in this smart contract fulfill the criteria set by the rules in the smart contract, the blockchain network then verifies the transaction automatically and produces an output.
Think of it like a vending machine. The cost to buy a bottle of water from the vending machine has to be coded in. Once you have dropped in the right amount of money, the product automatically gets transferred to your possession after hitting the button. If you do not place enough money into the machine, you will not get the product. If you place more than enough money, you’ll get your product and some change to go with it that is equals to difference between the product price and the amount of money you gave.
While this means that smart contracts work 24/7, they cannot navigate the intricacies of certain scenarios that require conflict settlement. Although they are currently unable to navigate the complexities in the enforcement of the clauses within legal contracts, they are incredibly useful tools for many legacy and paper-driven industries that are ripe for automation of simple tasks.
Smart contracts do indeed have their fair share of flaws, and I have identified 3 main pillars that have to be erected in order to address them.
Pillar #1 — Oracles are key
Because smart contracts live on blockchain networks (for example Ethereum and Binance Smart Chain), they are unable to access information from the outside world.
Therefore, oracles are vital in the next stage for smart contracts. Oracles take in information from the outside world and filter out the relevant information for the smart contract.
Let’s take an example of me loaning you $100. Imagine if there was no way for me to know if you had successfully deposited the collateral, it would destroy the very basis of our agreement, leading to a breakdown of the deal.
These oracles feed external information to the smart contract to unlock changes within the ledger. Without oracles, smart contracts cannot reach the real world.
Pillar #2 — Secure Coding
Everyone needs to be able to “trust” the code of the contract. If there is a loophole in the contract, exploitation will happen like in the case of Pancakeswap. In October or November 2020, there was a huge error within the CAKE smart contract that caused a massive sell off, plummeting the token price to less than a dollar.
Such issues with the coding of the smart contract will result in catastrophic failure.
Pillar #3 — Settlement Procedures
In order for smart contracts to achieve mainstream adoption, there is the need for robust settlement procedures. These are crucial to ensure that if any disputes arise, there are processes in place to organise and carry out rectifying instructions.
This chasm is perfectly represented in the 2013 film Elysium where Matt Damon’s character visits a government bureau to collect drugs to treat his cancer induced by accidental radiation poisoning. He tries to reason with the bureaucratic robot but is unable to do so because the robot is only programmed with rudimentary conflict resolution capabilities. The robot proceeds to dump pills on him without addressing the root cause of his visitation. Another option presented to him (to speak to a human being) would probably only occur after he has died.
Looking to the future, merging legal contracts with smart contracts will take a long time and multi-disciplinary studies across computer science, economics and the legal profession are needed in order to take the next step forward.
In a Web3 future, the process of buying a car could look completely different from how things are currently. Smart contracts can be used to streamline the process of interacting with trusted third party intermediaries.
For all of that to happen, smart contracts need to support the required criteria of purchasing the vehicle. It could mean that multiple smart contracts are required or the level of complexity in a single smart contract must be very high.
For a full read into Adriel’s piece, do see here. Until next week!
