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Blockchain & Smart Contracts

Contracts from the snack machine

Blockchain & Smart Contracts

Nothing seems impossible in blockchain technology - buzzwords like Bitcoin, Ethereum and smart contracts are currently buzzing around the web. Having already looked at digital currencies, we now ask what is so smart about contracts based on the blockchain.

Trustworthy Thanks to Blockchain Technology

When we talk about smart contracts, we are actually talking about a further development of blockchain technology ("Blockchain 2.0"). Smart contracts can be used to program and automate contractual relationships. A smart contract can be vividly compared to a snack vending machine. Each of us has pulled a small snack for in between from the vending machine. It's very simple: select the snack, enter the key combination, insert the money, and bang - the coveted snack lands in the dispenser.

It's a similar story with smart contracts. The idea behind this is that contracts are represented in software and hardware in such a way that performance and consideration are predetermined by the program logic. This also means that there is no longer any need for a human entity to execute the contract. The contracting parties no longer need to "trust" each other. One simply trusts that the machine will work. Or imagine standing in front of a snack vending machine and wondering if they can trust that their much-coveted snack will actually be dispensed? No - they know that they will soon have their candy bar in their hands - provided the machine is working properly.

In the case of smart contracts, the trust is created by blockchain technology. Each transaction, or smart contract, is validated by a peer-to-peer network and recorded in an immutable chain of entries. The list of all entries is stored decentrally on all computers in the network. Each transaction thus becomes immutable and transparent - and secure through cryptographic encryption.

Smart Contracts and Their Possible Applications in Everyday Life

There are a large number of conceivable areas of application for smart contracts:

  • Car leasing: Leasing a car is only possible as long as the leasing installments are paid properly. A smart contract installed on the car's on-board computer uses an interface to the bank to monitor whether the installments due have been transferred on time. If this is the case, the car starts. If not, you have to take the bus.
  • PrePaid heating: By using appropriately programmed thermostats, the purchase of heating can be made dependent on the previous heating unit having been paid for.
  • Parking: Our car communicates with the parking lot by means of appropriate technologies to automatically pay for the parking time used.

So What Exactly Do We Mean by Smart Contracts?

There is not yet a universally accepted definition in the network community, but the following characteristics are essential for a smart contract:

  • a digitally testable event (i.e., paying for parking time: true/false),
  • a program code that processes the event (e.g., in the car's on-board computer),
  • a legal action that can be performed based on the event (e.g., opening the barrier to drive out of the parking garage).

A smart contract can therefore be described as software that sets legally relevant actions (including the actual exchange of services) as a function of digitally verifiable events (so-called: "if-then scheme").

And here we find the connection to our snack vending machine again, because in summary, it must be stated that Smart Contracts are not contracts in the legal sense. Rather, they serve the real exchange of services of digitally referenced goods. They automate the exchange of performance, because when a "contract" is concluded, the exchange of performance occurs under the precisely defined condition.

The Future of Smart Contracts

In addition to all the possibilities, smart contracts currently pose a legal challenge, because how do you program indeterminate legal terms (e.g., unfaithful, reasonable) or warranty cases? A human decision is needed here, as such cases cannot be "translated" using a programming language. The success of smart contracts depends on some important factors - among them are technical (e.g., resource consumption, limitation to digital facts, etc.) and the legal challenges (e.g., enforcement issues, privacy law, liability, etc.).

So, on the one hand, there is still a long way to go before smart contracts will be suitable for everyday use. On the other hand, blockchain-based contracts open up a wide range of opportunities to move forward in the digital transformation.


Blockchain - a driver for decentralized business models

Written by

Anna Maliszewski
Expertin für Smart Contracts