5 questions about Smart Contracts

The use of blockchain is most commonly associated with the cryptocurrency bitcoin. But what about its use in smart contracts?

Although blockchain technology was originally developed for operating bitcoin, it can be used in many different fields going far beyond cryptocurrencies.  One example is smart contracts. These involve a number of data processing steps, i.e. computer code or programs that use very simple conditional constructs based on an ‘if-then’ logic. This means that contracts are concluded if particular conditions are met.

How exactly can blockchain technology be used for smart contracts?

The special thing about smart contracts is that the computer code they are based on is permanently stored and executed on a blockchain network. Before an operation is executed, it is validated by a network of computers. Data processing steps which are binding for all parties involved are combined, making it possible to conclude contracts without involving a third party such as a notary. Smart contracts therefore allow a wide range of processes to run autonomously.

What are the benefits of smart contracts compared with traditional contracts?

Smart contracts involve computer code and algorithms that are run autonomously and permanently. These contracts are often different from traditional contracts in a legal sense. One example of a smart contract is electronic door locks in cars. These can check whether the person unlocking the car has paid the fee for leasing it or if he or she has a driver’s license.

Smart contracts seek to guarantee a higher level of contract safety compared with traditional contracts whilst keeping transaction costs low. Laying down the terms of the contract in writing (either on paper or in a digital file) could therefore soon become a thing of the past.

For which sectors are smart contracts particularly important?

Smart contracts are particularly important for all sectors that benefit from automating business transactions with external business partners. This includes in particular the financial and energy sectors, the insurance industry and the automotive sector. In the US, even wedding ceremonies are now being handled using blockchain technology: the spouses simply have to scan a QR code and don’t even have to be in the same place to do this. Data about the contract – in this case the marriage – is stored on the blockchain database.

How secure are smart contracts?

Blockchain is considered to be incorruptible. Once a smart contract has been concluded, it is impossible to alter any of its terms retroactively. The algorithms specified in the contracts are executed reliably and strictly the way they were programmed. But this also means that any smart contract is only as good as the underlying computer code. If the code underlying the smart contract is not secure, then the smart contract will execute this non-secure code.

Stefan Thon is head of STROMADO. STROMADO is a start-up from the Dresden/Leipzig hub and provides blockchain infrastructure for the energy sector. STROMADO has joined with the Fury Network to develop and run an open blockchain network focusing on energy market transactions.