Smart contracts: Definition and applications

Smart contracts are one of the most promising types of use in blockchain. In practical terms, these are autonomous programs which, once started, automatically execute predefined conditions and are registered in the blockchain. They function like any conditional statement of type “if – then” (if this condition is verified, then such consequence runs).

To illustrate a possible use of smart contracts, take the example of travel insurance: finding that 60% of passengers insured against the delay of their flight never claimed their money, a team created at a hackathon in London in 2015 a Automated insurance system based on smart contracts. With this service, passengers are automatically compensated when their flight is late, without the need to fill out any form, and therefore without the company having to process the requests. To trigger, the smart contract connects to a previously defined database as reliable, in this case an airport database.

The contribution of blockchain is to generate the confidence and security necessary to automate the declarative phases without resorting to a third party.

Another imaginable example, in the same register, is that of the so-called Index insurance (linked to an index such as temperature or rainfall level). Thus, a smart contract between the farmer and the insurer may stipulate that a payment be made after 30 days without precipitation. The smart contract is again fuelled by reliable external data (e.g. rainfall data of the National Meteorological Service), which allow to automatically trigger the payment after 30 days of drought, without the intervention Of an expert or the necessity of declaring or claiming the insured.

The advantage of setting up smarts contracts in a blockchain lies in the guarantee that the terms of the contract cannot be changed. A smart contract that would not be in the blockchain would be a program whose terms could be changed in running.

Smart contracts reduce the costs of verification, execution, arbitration and fraud, and are able to overcome the problems of moral hazard. The American cryptographer Nick Szabo (many of whom think, moreover, that he would be the individual behind the pseudonym Satoshi Nakamoto, inventor of Bitcoin and therefore of the concept of blockchain) is the inventor of the smart contracts, which he had spoken from 1995. He had, in particular, given the example of a rented car, whose smart contract could automatically restore control of the operation of the car to the landlord if the tenant fails to make payments on time.

As Primavera de ferns, a researcher at Cersa (CNRS) and the Berkman Center for Internet & Society at Harvard University, explains, a smart contract is a software program. In view of their names, we tend to equate them with contracts, but they do not in themselves have legal authority. When a legal contract exists, the smart contract is only a technical application of this contract. »

More generally, smart contracts are at the heart of the applications developed on the blockchain Ethereum.

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