Year in, and year out, people continue to wonder how long the crypto hype is going to continue. The volatility of the market keep leading some to believe that the digital currency’s time has come to an end. But without fail, it always pops back up again… why?
This month at The Fintech Times we’re going to be looking at what makes digital currencies so popular. We will also be uncovering the emerging alternatives to cryptos and why the digital future looks so intriguing. Continuing this focus, we hear industry views about smart contracts and why they are so revolutionary.
We gathered a variety of views from across the industry. We hear from Trey Smith, Dan Burnett, Boaz Shoshan, Vyacheslav Zholudev and Jacob Plaster.
Solving issues with “arduous” traditional contracts
Trey Smith is the CEO and founder of web3 game Mech. He explains the purpose of smart contracts and the potential they have.
He said: “Smart contracts can be tricky to properly understand because they tend to cover so many different apps. But in short, a smart contract is simply a computer program that is built by developers to run by itself when a set of predefined criteria are met and then get verified on the blockchain. This might seem a bit banal, but the key part is “runs by itself”. Let’s take a look at an example.
“Imagine the following situation. You and I sign a [traditional] contract stating that whenever you give me a banana, I need to give you a peach. And that works fine as long as the terms of the contract are respected by both parties. But what happens when you give me a banana one day, and I decide I’m not giving you a peach? Well, you can take me to court, we both hire lawyers, and if it is deemed I am in the wrong, the court will command me to give you a peach. It can be a long, expensive, and arduous process.
“Let’s compare this to a smart contract. If I want to create a way to exchange banana coin for peach coin, I will write a program (a smart contract) that automatically sends 1 peach coin to anyone who sends a banana coin. And I will make the program so that it only works until I run out of peach coin, and once I do, I will no longer be able to receive banana coin.”
Smith also spoke on services smart contracts could replace:
“Smart contracts are by their nature immutable and self-executing. The former makes them almost impossible to hack, at the cost of rigidity. The latter is extremely convenient as it enables certainty as well as removes the need for intermediaries. This makes them excellent alternatives to the traditional banking system, where every transaction requires permission from intermediaries, such as banks, Paypal, Payoneer, and the like.
“While it’s easy to see how useful smart contracts could be in various sectors, such as digital identity, trade finance, financial security/services, insurance, law, escrow, clinical trials, and many more, the reality is that we are far from using smart contracts for all of those. For now, smart contracts are by and large used in those sectors where security and certainty are paramount, such as finance and insurance, and where rigidity and automation are not considered a major problem.”
Security of smart contracts
Dan Burnett is the executive director at Enterprise Ethereum Alliance (EEA). EEA is a global community of blockchain leaders, adopters, innovators, developers and businesses.
Burnett explains: “The term ‘smart contract’ was first introduced in the 1990s, but the concept reemerged with the launch of Ethereum in 2015 and is now frequently associated with blockchain technology. Smart contracts are written as indisputable ‘if-then’ statements, meaning if x happens, then y will automatically happen. For example, if an agreement exists where one party owes something to another, payment is automatically delivered once the contract terms are met, eliminating the need for human action to complete the transaction.
“Developers create smart contracts by writing code that specifies the rules they want to enact. That code is then pushed to the Ethereum network, which implements the contract. At that point, the contract cannot be edited or altered by anyone and will execute without fail on the terms coded into it. This is extremely valuable for businesses, as automation brings huge efficiencies to time and cost.”
Why are smart contracts so revolutionary?
Burnett continued: “Smart contracts are revolutionising the way businesses interact because they promote greater levels of efficiency and security. Specifically, once terms are agreed to and code is written, the contracts operate autonomously. Additionally, there’s no concern about a third party making unauthorised edits to the code, as smart contracts cannot be altered.
“They are also ‘trustless’ as there is no need for a high level of trust between operating parties as actions are automatically executed. Speaking of trust, another benefit of smart contracts is that they remove any issue around contract interpretation, as they are extremely precise and execute exactly as the code is written. Finally, smart contracts are considered ‘Turing-complete’ which means they can support a wide range of computational instructions and be written to automate just about anything. This has huge implications for businesses across all sectors that are looking to lower costs and drive efficiencies.
“As with any new technology, smart contracts have challenges that still need to be addressed, but it is unquestionable that they have the potential to revolutionise the business landscape and how transactions are executed.”
Cutting out the middleman
Boaz Shoshan, communication strategist at cryptocurrency exchange Orca. He explains:
“Smart contracts, put simply, ‘cut out the middleman’. Instead of relying on a gatekeeper who could make a mistake or have bad intentions, smart contracts execute automatically based on a pre-determined set of conditions. This automatic execution without relying on a third party can create great advances in efficiency. And when open-sourced, this can deliver total transparency to users. Anyone can read the code to validate how the smart contract will behave or even extend the code to build entirely new products.
“As recent history has shown, users that trade on centralised crypto exchanges may run the risk of the exchange becoming compromised. The world of DeFi (“decentralised finance”) aims to solve this by using smart contracts. There are gatekeepers everywhere today. Especially in the world of finance. So the scope of how revolutionary smart contracts could be is great indeed.
The Solana ecosystem
“Orca’s smart contract allows users to trade tokens in the Solana ecosystem without making a deposit with a third party. Instead of surrendering custody of their holdings to a gatekeeper who could be unreliable (like a centralised crypto exchange), users can simply connect their wallet to a UI that routes transactions through the smart contract, and buy or sell tokens on the market directly. In the interests of transparency and encouraging innovation, Orca’s core smart contract is open source.
“The risk with smart contracts is that errors are made in their construction, which are exploited by bad actors. That’s why Orca hired smart contract auditing firms Neodyme and Kudelski to audit its smart contract and ensure its safety to the highest degree possible. Further, Orca has listed a bug bounty of up to $500,000 on ImmuneFi for those who can find exploitable errors in the smart contract.”
“Smart contracts have many more middlemen to ‘cut out’. This nascent revolution is in its infancy.”
Supporting regulation for crypto
Vyacheslav Zholudev is a co-founder and CTO at the verification platform Sumsub. He said:
“Smart contracts securely automate and decentralise deals or transactions, no matter how complex, including without a ‘trusted intermediary’ (i.e. bank). Since smart contracts run on a blockchain, they guarantee security, reliability, and borderless accessibility. The code for a smart contract can be created and deployed to a blockchain by anyone, as the code is transparent and publicly verifiable. Human intervention, like trusted escrow holders or the judicial system, is not required once the smart contract has been deployed and is operational, reducing the execution and enforcement costs of contracting.
“Smart contracts are universal and can be used in financial tools, logistics game experiences, etc. but the main area of application is in crypto. The main challenge in crypto is regulation implementation to protect end consumers and businesses. Smart contracts can assist in collecting and exchanging data from transaction parties, which is demanded by the Travel Rule (or FATF recommendation #16).
The Travel Rule
“Travel Rule first applied to banks but later expanded to crypto in 2019. It requires them to collect and share participants’ personal data in transactions. The US, Germany, the Netherlands, and Estonia have already made the Travel Rule obligatory. Depending on the jurisdiction, crypto platforms may have to comply with the Travel Rule earlier than expected. It’s crucial to prepare since consequences include fines, reputational damage, and license revocation. Working with over 500 crypto clients, Sumsub designed a smart contract-based solution for seamless data exchange between platforms to support compliance infrastructure for crypto. The platforms not currently covered may soon be connected to this ecosystem through the new blockchain-native protocol the Sumsub tech team is developing.
“The solution includes KYC checks, monitoring, and verification orchestration for business needs and regulatory specifics. This introduces a new standard for data transmission on blockchain for platforms to safely exchange user data and perform smooth transactions in a fully compliant way.”
Full transparency, without change
Jacob Plaster is CTO at API-driven financial platform provider IoFinnet. He commented:
“Two words: trustless immutability. In other words, smart-contract code explains with full transparency how assets are processed and cannot be changed over time.
“Lending/borrowing smart contracts. Shows exactly how liquidation and risk calculations are implemented.
“Exchange smart contracts. Shows exactly how orders are matched within order books and who (if anyone) has control over the system.
“Escrow smart contracts. Shows exactly which terms need to be met for the release of funds. This removes the need for any unnecessary middlemen or legal proceedings.
“At IO, we see how the traditional world of finance is desperate for this kind of technology.
“According to bis.org, SWIFT handles 56 per cent of all cross-border payments made worldwide. It does not, however, provide information on who controls the assets at what point in time. Traditional exchanges provide no information about who controls the assets and operates behind the scenes. We think that smart contracts are revolutionary because they will bring transparency and auditability to an otherwise black-box world.”