Smart Contracts: back to the future
2040. Let’s imagine Robert. Robert has decided to sell his car for CHF 20’000. A few years ago, Robert would have put it online on the Internet using an intermediary operating a platform, such as anibis, and then would have used financial intermediaries to enable the payment of the price, whether credit card issuers or banks, before being able to proceed with the transfer of the driving license to the motor vehicle department. Various control procedures would have taken place at each stage.
But this is 2040; all these intermediaries are no longer necessary. Even more, they are on the way to disappear. The decentralization made possible by the Blockchain protocol and the development of “smart contracts” has gradually made these intermediaries obsolete.
To sell his car, Robert simply used a website that allowed him to identify himself using the address of his wallet, the hash 757382, and to define the terms of the “smart contract” that would allow him to ensure the sale of his vehicle. Robert was able to add a few options, such as the possibility for the buyer to take out liability insurance with a company that has a wallet.
Stephanie has discovered Robert’s car on the Internet and wants to buy it. She transfers the amount of CHF 20,000 from her wallet with the address 398157 to Robert’s wallet.
The various nodes in the network (which now play the role formerly assigned to these intermediaries) ensure that Robert is the owner of the vehicle and that Stephanie has the necessary funds before validating the transaction.
Once this is done, this transfer automatically leads, according to the terms of the “smart contract“, to the transfer of the traffic permit, which is itself registered on the blockchain at address 738497 and gives Stephanie access to the “smart lock” of the garage where Robert’s car is located, and she is now entitled to access it.
Stephanie can now pick up the vehicle by de-securing the access code with a QR-code that identifies her.
Although this scenario seems futuristic in 2022, this massive decentralization could happen in the coming years thanks to the development of “smart contracts“. What are we really talking about?
The “smart contract” is not a contract in the strict sense of the word, but the transposition into computer language (i.e., source code) of contractual terms recorded on a blockchain protocol, allowing for automatic execution under predefined conditions. This will sound familiar to the ones acquainted with EDI software, that also enabled automated performance a contract in a B2B environment; the use of cryptography however gives “smart contracts” additional important features in terms of authenticity, integrity and immutability.
In the vast majority of cases, the protocol used today is the ERC-20 standard (and the one, improved in terms of token transfer, ERC-777), which runs on the Ethereum blockchain, and the Solidity programming language.
However, we must admit that despite the hype that currently exists around the Blockchain and “smart contracts“, their adoption is still far from being “mainstream“. There are several hurdles to overcome on their way. Let’s mention some of them:
- Presented as an advantage, the immutable nature of smart contracts is also a disadvantage. While it may be easy to correct a contract in which an error has crept in, modifying the code on the blockchain is not. In other words, any error becomes particularly difficult to correct, if not impossible. This is why it is important to take the time to have your code audited by companies that are experts in this field, such as OpenZeppelin. However, few people seem to take the time to do so, so that, statistically, 25% of the “smart contracts” would contain errors.
- While “smart contracts” lend themselves to the execution of simple transactions, their adoption could prove more complicated for managing the implementation of certain rights. If we think for example of copyright, it could of course be tempting to make the consultation of a work conditional on the payment of an automatically generated royalty to the author. Some have tried this, such as the artist Imogen Heap, whose use of the blockchain for the exploitation of her work “Tiny Human” has however generated more buzz than royalties, a total amount of USD 133.20… In addition to this, coding indeterminate legal concepts requiring interpretation, such as exceptions or “Fair use”, does not appear to be easy.
- The majority of “smart contracts” are written on the Ethereum protocol. The transactions concluded require the payment of transaction fees (known as gas fees) which have become significant due to the success of the protocol. The importance of these fees is not compatible with the micro-payments that are supposed to be made possible and facilitated by the Blockchain.
- Last but not least, consumers are now used to subscription models like Spotify, Netflix and other content providers. No one knows if consumers will be inclined to change their model and go back to micro-payments for such content.
In the end, there is still a long way to go before 2040. This scenario is one of the possibilities, but it is still a long way off. Many questions remain to be solved before smart contracts can be deployed on a massive scale. The future will tell whether developers and other high-tech entrepreneurs will manage to cross the various hurdles and which one will cross the finish line victoriously. To be continued.
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