The Blockchain Technology That Will Disrupt Third Parties

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A Beginners Guide to Ethereum Smart Contract Programming

Although the initial use of blockchain was for cryptocurrency such as Bitcoin, blockchain offers much more than just a record of transactions. In addition to trading cryptocurrencies, some implementations of blockchains offer the idea of smart contracts. In particular, the Ethereum is one such example. Like Bitcoin, Ethereum offers a cryptocurrency known as Ether, but it also turned all the nodes in the network into “Turing complete” computers. What this means is that you can write programs (known as smart contracts) and execute them on all the nodes on the network.

Ethereum implements an execution environment on the blockchain called the Ethereum Virtual Machine (EVM). Every node participating in the network runs the EVM as part of the block verification protocol. They go through the transactions listed in the block they’re verifying and run the code as triggered by the transaction within the EVM. Each and every full node in the network does the same calculations and stores the same values.

To understand how a smart contract is useful, let’s imagine the following scenario. You’re a musician and you want to protect your intellectual property, in this case, your music creations. You want to make sure that the lyrics of your songs are protected and that no one else can plagiarize them (especially before they are released). Because data stored on the blockchain is immutable and time-stamped, it’s a good platform to store the lyrics of your songs as the proof that you’re the original creator of the song. However, blockchain data are inherently public, so storing the lyrics of your creation on the blockchain isn’t practical. A good workaround for this case is to store the hash of the song’s lyrics. That way, you maintain confidentiality of your creation, and at the same time you can prove that the lyrics are written by you if you are able to provide the original lyrics to generate the original hash.

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Smart contracts and blockchain

The concept of smart contracts is primarily based on the idea of blockchain technology. A blockchain is a decentralized network of a growing list of records (blocks) that are linked through cryptography. A blockchain network does not include a single central point like a conventional database.

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Smart Contract Best Practices

We are at the nascent stages of smart contract adoption, best practices for implementing such code is still evolving. However, the checklist below should help developers design effective smart contracts and guide companies who plan to use them.

  • For now, parties entering into any type of contractual arrangement would be best served using a hybrid approach that combines text and code. As noted, there are strong arguments that code-only smart contracts should be enforceable, at least under state contract law in the U.S. However, until there is greater clarity on their validity and enforceability, code-only smart contracts should be used only for simpler transactions. Parties will continue to want text-versions of agreements so they can read the agreed-upon terms, memorialize terms that smart contracts are not equipped to address and have a document they know a court will enforce.
  • In a hybrid contract using text and code, the text should clearly specify the smart contract code with which it is associated, and the parties should have full visibility into the variables that are being passed to the smart contract, how they are defined and the transaction events that will trigger execution of the code.
  • When relying on oracles for off-chain data, the parties should address what would happen if the oracle is unable to push out the necessary data, provides erroneous data or simply goes out of business.
  • The parties should consider risk allocation in the event of a coding error.
  • The text agreement accompanying the code should specify the governing law and venue, as well as the order of precedence between text and code in the event of a conflict.
  • The text agreement should include a representation by each party that they have reviewed the smart contract code, and that it reflects the terms found in the text agreement. Although such a representation cannot force a party to examine the code, it will help the counterparty defend against a claim that the code was never reviewed. Parties may also choose to insure against the risk that the code contains errors. As noted, parties may need to involve third-party experts to review the code.

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