Smart Contract Smart Contract

Blockchain technology ensures that data is not altered during the transfer process. Therefore, it can find application not only in the field of finance, but also in other areas, including real estate and health care. Blockchain offers special features called smart contracts. Smart contracts are automatically created on the system, copied to different repositories, and executed using distributed computing. Therefore, after the execution of a smart contract, it cannot be fixed, even if vulnerabilities are later discovered in it.

Principle of operation

The parties sign a smart contract using methods similar to the signing of sending funds in existing cryptocurrency networks. After signing by the parties, the contract comes into force. To ensure the automated fulfillment of contract obligations, an environment of existence is necessarily required, which allows you to fully automate the implementation of contract clauses. This means that smart contracts can only exist within an environment that has unobstructed executable code access to smart contract objects.

All terms of the contract shall have a mathematical description and clear execution logic. In this regard, the first smart contracts have the task of formalizing the simplest relationships, consisting of a small number of conditions. Smart contracts, for example, can monitor the fulfillment of long-term loans.

Having unhindered access to the objects of the contract, the smart contract monitors the achievement or violation of clauses under the specified conditions and makes independent decisions based on programmed conditions.

Thus, the basic principle of a smart contract is the complete automation and reliability of the fulfillment of contractual relations between people.

A smart contract can update data on the blockchain according to originally set rules - for example, transfer digital assets from one participant to another. As soon as the new technology gains momentum, smart contracts will make a real digital revolution that will be comparable to the invention of HTML, which radically changed the Internet, and subsequently the entire global economy.

Proponents of smart contracts argue that many of their species can be made partially or fully self-fulfilling and self-sufficient. Smart contracts based on cryptography can provide better security than traditional contracts based on law and reduce other transaction costs associated with the conclusion of contracts and possible legal costs.

According to the British magazine The Economist, smart contracts have the prospect of becoming the most important application of blockchain technology ^[1].

Examples

• By analogy with the IPO, an ICO is being introduced  - a crowdfunding method for organizing startups. Based on the published memorandum, investors send funds to the account of the corresponding smart contract, receiving in return tokens that play the role of shares in this startup. As of August 2017, the volume of investments in ICO is $550 million.

• There is an idea to create a decentralized, Ethereum-based product similar to Facebook, where users will have full control over their personal pages, which will allow them to generate advertising revenues themselves, instead of any company.

• The ability to create a securities market without the participation of a stock exchange or clearing house. For the implementation of contracts, neither the services of lawyers, nor platforms protected from unauthorized access for voting, polling, without the need to count votes, without processing ballots by an electoral body and without the participation of a sociological center are needed.

The first large and promising area of ​ ​ blockchain development is financial. These are cryptocurrency, smart contracts, and state registers. For example, now it takes several weeks to sell a house, and this can take only 3 minutes.

History

2023

VTB presented options for using smart contracts with a digital ruble

On July 7, 2023, VTB submitted its proposals for basic scenarios for the use of smart contracts with a digital ruble for individuals and legal entities. Read more here.

EU parliament passes law regulating smart contracts

On March 14, 2023, the European Parliament voted to pass a new law regulating smart contracts. We are talking about the introduction of an "emergency switch to reset activity" - the so-called Kill Switch function.

Smart contract - a contract written in the form of computer code and cryptographically signed by the parties to the transaction. All provisions of such an agreement should be available on a trusted platform, for example, on cryptocurrency. After signing by the participants, the smart contract is stored in the blockchain and comes into force.

Law prescribes implementation of Kill Switch in smart contracts

Resource CoinDesk reports that the passed bill, known as the Data Act, was initiated in 2022. It is designed to give people "more control over the information they get from smart devices." The document caused a mixed reaction from experts, however, the EU Parliament voted to approve it. In particular, 500 voting participants spoke in favor, 23 people opposed, and another 110 parliamentarians abstained.

The provisions included in the law mean that smart contracts "must have access control and protect trade secrets." They must also have features to suspend or reset. But experts fear that such opportunities could undermine the very concept of smart contracts. The fact is that the document does not indicate who exactly can initiate the disconnection or reset of a smart contract. In other words, such an approach contradicts the fundamental principle that automated programs cannot be changed by anyone.

This puts smart contracts in danger to such an extent that no one can predict the consequences, "said Thibault Schrepel, associate professor at Amsterdam Free University.[2]

2021: Commerzbank and BASF start using smart contracts to instantly pay suppliers

In mid-May 2021 Commerzbank , he announced his participation in a joint project with chemical companies BASF , in Evonik blockchain which smart contracts were used to instantly pay for supplier services. More. here

2020

Central Bank: Digital ruble will help introduce smart contracts for state payments

On December 23, 2020, the first deputy chairman of the board of the Central Bank of the Russian Federation Skorobogatov, at an online speech by representatives of the regulator, said that the digital ruble would allow the use of smart contracts. In particular, according to her, such a technology can be used in state payments, government and financial services. Read more here.

Russian Railways begins the introduction of smart contracts to support cargo transportation

On May 20, 2020, Russian Railways announced the start of the introduction of smart contracts that provide contractual support for transport and logistics activities within the framework of digital law. Such a contract is considered automatically fulfilled when all its conditions are fulfilled: the cargo is transported, the money is transferred, and the participants have no claims against each other. Read more here.

2019

According to IDC forecasts, already in 2019, companies around the world will spend $2.9 billion on distributed registry technology (and by the way, this is almost 90% more than was spent in 2018). A critical part of corporate blockchain systems will be smart contracts - autonomous computer programs that will be responsible for a wide range of tasks, from bond payments and the transfer of property ownership to the authentication of pharmaceuticals^[3].

However, the increasing adoption of smart contracts in the business processes of companies will force the latter to face new cyber threats. An example is the 2016 attack on DAO, a decentralized autonomous organization that is a crowdfunding platform on the Ethereum blockchain. Attackers were able to steal cryptocurrency worth more than $60 million, taking advantage of the lack of a smart contract.

According to Hosho, security vulnerabilities cost blockchain companies more than $2 billion in 2018. As the audit showed, at least 1 in 4 smart contracts had critical vulnerabilities, and 3 in 5 had one security issue.

A service such as a smart contract audit helps solve the problem. Today there is already a new class of startups introducing technologies to protect corporate blockchain systems with an emphasis on auditing smart contracts. So, to monitor transactions, they use artificial intelligence technology, which allows you to identify suspicious activity, as well as scan the code itself to identify known vulnerabilities. True, the audit of smart contracts is still expensive and time-consuming.

2018

The State Duma should adopt laws on crowdfunding, on digital assets, electronic notary and smart contracts

The bill on crowdfunding in Russia should be adopted as a priority, as well as bills on digital assets, electronic notary and smart contracts. This was stated by the Assistant to the President of Russia, Chairman of the Supervisory Board of ANO "Digital Economy" Andrei Belousov, reports in December TASS Information Agency of Russia. According to him, these bills should be adopted in the autumn session of the State Duma (by the end of 2018) or at the very beginning of the spring session of 2019^[4].

As noted in the ANO, the crowdfunding law will contribute to the introduction in Russia of a new scheme for raising funds - through crowdfunding platforms. Recall that such platforms are network platforms for financing various projects by raising funds from third-party, often unprofessional investors. Regulation will help make these deals transparent and protect their participants.

As for the law on electronic notary, it will enable participants in electronic workflow to save time on the certification of documents and transactions. When making transactions, it will be possible to exchange electronic messages, and not paper documents.

After smart contracts are legalized in Russia, it will be possible to conclude contracts, the fulfillment of the conditions of which will be monitored by computer programs. Such a condition can be, for example, a payment schedule - payments will be carried out automatically.

The first bonds in Russia using smart contracts on the blockchain

In May 2018, MTS, the leading telecommunications operator in Russia, Sberbank CIB, Sberbank's corporate investment business and the National Settlement Depository (NSD) placed the first ruble commercial bonds in Russia using blockchain technology with the implementation of the full life cycle of the security in the form of a set of smart contracts - from placement to full fulfillment by the issuer of its obligations to the investor.

The National Settlement Depository has provided its own blockchain platform based on Hyperledger Fabric 1.1 for the transaction. Sberbank CIB became the organizer and main buyer of the issue of MTS bonds for a period of 6 months in the amount of 750 million rubles. Read more here.

2017: Canadian central bank creates blockchain system to manage securities and payments

On October 18, 2017, it became known that the central bank of Canada, Toronto Stock Exchange operator TMX Group and Payments Canada began joint testing of the use of blockchain technology to automate securities settlements. Read more here.

2016: Successful Wall Street testing

On October 18, 2016, it became known that large Wall Street banks completed testing of blockchain technology used for post-trading operations in stock exchanges. This was reported by Reuters with reference to the statement of the IT company Axoni, which in this project is responsible for the software infrastructure and execution control.

According to the head of Axoni, Greg Schvey, a blockchain-based processing system provides significant savings to financial companies involved in the transaction.

Wall Street banks mastering blockchain

Eight major banks, including JP Morgan, Credit Suisse, Barclays and Citi, as well as consultancy Capco and market information providers Markit and Thomson Reuters, took part in the experiment to use the blockchain solution and smart contracts in the processing of share swaps.

Companies have created a node connecting them with others over the network, "Gray Shway explained to the news agency.

According to him, the exchange of securities is a time-consuming and time-consuming procedure. Each swap dealer has its own systems through which one transaction goes. Due to the complex ecosystem and the presence of numerous levels of processing, transactions are often interrupted, Schwei noted.

Thanks to blockchain technology, joint processing works synchronously on one code, ensuring the correct update of the state of contracts, he added.

Complex contracts, distributed market structure and repeatable workflows make blockchain technology a natural solution for equity derivatives, "said Shway.

A pilot project to use blockchain technology for post-trading operations in the exchange of shares was launched in June 2016. By early September, the partners had performed 133 different structured transactions in test mode.

This is not the first blockchain project to be tested on Wall Street. In April 2016, JPMorgan, Citigroup, Bank of America, Credit Suisse, together with Axoni, successfully tested this technology to work with credit default swaps (CDS).

According to forecasts of Autonomous Research analysts, the use of blockchain will allow banks to save $16 billion annually on registering transactions, and the requirements for the adequacy of their capital will decrease by $120 billion.^[5]

2013: First practical application in Ethereum

Smart contracts first began to be applied in practice in the Ethereum project. The idea of ​ ​ creating a project appeared in 2013. At that time, the founder of Bitcoin Magazine, Vitalik Buterin, came to the conclusion that bitcoin was poorly suited as a basic protocol, since it was not originally designed for this task, and wrote in one of his articles about the idea of ​ ​ creating such a protocol from scratch.

2008: First blockchain-based implementation

Practical implementations were made possible thanks to the emergence of technology in 2008 blockchain^[6]. Some principles of smart contracts were laid down in the protocol of the first blockchain currency, Bitcoin but they were not implemented in client software, did not have Turing completeness for security reasons and were not used in practice. With the advent of technology, ideas began to be expressed that various higher-level protocols could be created on top TCP/IP of the bitcoin protocol, including full-fledged smart contracts, similar to how many application-level protocols exist on top.

1996: Nick Szabo puts forward the idea of smart contracts

The first ideas of smart contracts were proposed in 1996 Nick Sabo ^[7] 2017-07-29}}.

Smart Contract Objects

• Signatories are parties to a smart contract that accept or refuse conditions using electronic signatures. A direct analogue is the signature of the sender of funds in the Bitcoin network, which confirms the entry of the transaction into the block chain.

• Subject of the contract. The subject of the contract can only be an object located within the environment of the existence of the smartest contract, or it must ensure unhindered, direct access of the smartest contract to the subject of the contract without human participation. This is the most complex issue that could not be resolved until the advent of cryptocurrencies in 2009.

• Terms. The terms of a smart contract must have a complete mathematical description that can be programmed in the environment of the existence of a smart contract. It is in the conditions that the logic of execution of the clauses of the subject of the contract is described.

Environment for smart contracts to work

In order for smart contracts to exist, certain conditions are required:

1. Use widespread methods of electronic signature based on public and private keys (asymmetric encryption).
2. The existence of open, decentralized and trusted database contracts for executable transactions, the work of which completely eliminates the human factor. As an example: blockchain in Bitcoin.
3. Decentralize smart contract execution environment. As an example: Ethereum, Codius, Counterparty.
4. The validity of the digital data source. As an example: root SSL certification authorities in the databases of modern Internet browsers.

Shortcomings

At the beginning of 2018, the technology of smart contracts itself is not yet ready to conquer the market. This proved the discussed failure of the Decentralized Autonomous Organization (DAO): then a poorly formulated algorithm allowed a deft user of the popular Ethereum blockchain platform to steal millions of dollars in digital equivalent. Smart contracts should become a much more reliable solution in order to achieve the level of security that is necessary for widespread application in the financial sector.

Problems with smart contracts remind us that even taking into account all the promises, blockchain remains an experimental technology with its shortcomings. First of all, infrastructure, performance and data privacy come to mind. The use of blockchain in the field of coordination of trading operations, payments and other similar processes provides for the creation of complex tools for ensuring management and control of access to information. At the same time, the blockchain was originally developed just so that each participant in the chain could view the totality of all data. For example, in the Bitcoin system, any user can study the full register of operations if desired.

If we talk about private (controlled) blockchains, then by default they allow you to provide two types of access: read-only and read/write. In addition, you can issue permits for mining, obtaining and issuing assets. However, real-world applications that are used, for example, in stock markets, require more flexible and detailed schemes for access control. The openness of data on all perfect transactions registered in the public registry is unlikely to appeal to market participants. Ideally, enterprises could connect data on their users and groups created on LDAP using a blockchain platform. And this is a significant problem for which no solution has yet been found in 2017.

Observers have expressed concern that the proliferation of automated contract maintenance technologies could weaken existing social institutions that humanity has built up for generations. In addition, such technologies can lead to the disappearance of a large number of administrative jobs, as well as robotization has led to the disappearance of industrial jobs^[1]. This applies, in particular, to notaries, bank employees, as well as to clerks engaged in registration of transactions with real estate^[8]

Notes