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Smart Contracts and Distributed Ledger

The UChicago_DS_0103
(The University of Chicago, Alvin Wei-Cheng Wong)



Smart Contracts and Distributed Ledger


Smart contracts, a central component to next-generation blockchain platforms, are computer protocols intended to facilitate, verify, or enforce the negotiation or performance of a contract. Proponents of smart contracts claim that many kinds of contractual clauses may be made partially or fully self-executing, self-enforcing, or both. The aim with smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting. Smart contracts use autonomously executed software programs running on a distributed ledger to automate business processes. Blockchain is the database and smart contracts is the application layer that makes much of the benefits of blockchain technology a reality. Smart contracts cause a convergence of smart devices, analytics, artificial intelligence, cloud, and blockchain technologies. 

Smart Contracts, often created by computer programmers through the help of smart contract development tools. They are simply computer program code (such as C++, Python, Java) that is capable of facilitating, executing, and enforcing the negotiation or performance of an agreement (i.e. contract) using blockchain technology. This code defines the rules and consequences in the same way that a traditional legal document would, stating the obligations, benefits and penalties which may be due to either party in various different circumstances. This code can then be automatically executed by a distributed ledger system. The entire process is automated can act as a complement, or substitute, for legal contracts, where the terms of the smart contract are recorded in a computer language as a set of instructions. 

To accelerate the adoption of smart contracts and realize higher benefits, enterprises need to develop a smart contract pool that can connect legal text to business logic and eventually convert to smart contracts on a distributed ledger. Industry standards need to emerge for enterprise adoption. Security of smart contracts is an arena of concern. 

Smart contracts have been used primarily in association with cryptocurrencies. The most prominent smart contract implementation is the Ethereum blockchain platform, which also calls them decentralized applications or dapps. In addition, Trade finance, post-trade services, and event-driven insurance are the leading use cases being piloted/experimented by financial services institutions.  Loyalty and rewards, smart power grids, and digital rights management are the top use cases being piloted in other sector. 

Anatomy of a Smart Contract


The main goal of a smart contract is to enable two anonymous parties to trade and do business with each other, usually over the Internet, without the need for a middleman. Smart contracts are becoming a cornerstone for enterprise blockchain applications and will likely become one of the pillars of blockchain technology. For example, A wants to send money to B. The transaction is represented online as a block. The block is broadcast to every party in the network. Those in the network approve the transaction is valid. The block then can be added to the chain, which provides an indelible and transparent record of transactions. The money moves from A to B. Blockchain technology undermines the "middle-man" business model. It makes it harder to cheat in transactions, and so reduces the value of credibility lent by trusted intermediaries. 

Distributed ledgers are often viewed as most attractive to industries with businesses that lack a central institution they can trust to keep their records. The implications of decentralized ledger technology (DLT) are astounding: Digital trust is now an ever reasonable possibility; meaning online and offline assets can now be assigned ownership and the transference between those parties can be proven both linearly and cryptographically. Now, people everywhere can trust each other and transact peer to peer. And trust is established, not by some big institutions, but by collaboration, by cryptography and by some clever code. It could offer a new way to move money and track transactions across borders and other networks in a more secure, transparent and effective way than the current system. 

Blockchain will do for transactions what the Internet did for information. In the case of the Internet of Things, we’re going to need a blockchain-settlement system underneath. Banks won’t be able to settle trillions of real-time transactions between things. So this is an extraordinary thing. An immutable, unhackable distributed database of digital assets. All of the advantages derived from basic blockchain technology can be boiled down to only two benefits; corruption resistance and redundancy. This is a platform for truth and it’s a platform for trust. It is fast becoming a symbol of the fourth industrial revolution. 

Blockchain is the technology that creates a ledger of transactions on the Internet. It is a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers. Blockchain uses cryptography to allow each participant on the network to manipulate the ledger in a secure way. It quickens the ownership validation process, executes transactions in just minutes or even seconds. Like the Internet, the blockchain is an open, global infrastructure upon which other technologies and applications can be built. And like the Internet, it allows people to bypass traditional intermediaries in their dealings with each other, thereby lowering or even eliminating transaction costs. 


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