The functionalities of the Bitcoin blockchain, although revolutionary, are limited because they reside solely in the exchange of value as we will detail in the next chapter. Following this reflection, a young 19-year-old computer programming prodigy, Vitalik Butterin launched his own blockchain, the Ethereum. In addition to the exchange functionality, this young developer adds the possibility of creating intelligent contracts not restricted by the programming code, unlike Bitcoin.

The smart contract

The principle is simple, as Sinclair Davidson explains in his study “Blockchain and the economic institutions of capitalism” about the Ethereum. Tomorrow you want to sign a contract with a person in China and you are in France. You must pay him a certain amount of money for a service, it is better to go through a trusted third party to be sure that he meets these obligations and does not fly away with your money. That is the purpose of the smart contract.

Let’s take our example again, you post your smart-contract on the Ethereum network and program it so that €20 is immediately debited from your account when you receive a community management service. You will not need to check that the work has been done correctly. Indeed, your service provider, once the service has been rendered, will enter all the necessary information to prove that it has provided the service in comparison to your expectations clearly indicated in the smart contract. The contract will then be verified by several users working for the Ethereum network, they will be paid in Ether (the cryptocurrency used on the Ethereum blockchain) for this service.

As a result, the first person will verify the execution of the contract and approve or not its execution. Several other independent third parties will have to validate the decision of the first auditor in order for the contract to be performed. These smart-contracts have the advantage of being flexible. A dissatisfied party may request a new audit or add evidence of the work done. It is also possible to link several contracts together, the possibilities of creation and development being unlimited.

They therefore provide an element of trust between two individuals and represent the adaptation of paper contracts. Their purpose is to legally bind the two parties by programming the smart contract and defining the obligations of the two parties operating under the Solidity programming language.

The coding forms

The coding form is relatively simple and logical, it is constructed as follows:
– IF/WHEN you provide me with the service X, THEN I send you the sum of ether Z
– IF/WHEN I finish the job, THEN the amount of ether will be mine
– IF/WHEN the service does not suit me (definition of non-conformity), THEN the money will be returned to me

A word from the CIA

In summary, this technology is innovative for several reasons. First of all, the simplicity of programming, unlike a traditional contract. The drafting of a classic contract involves the involvement of a legal entity which, to ensure the legality of the contract, will detail a large number of mandatory legal concepts. Although the coding principle can frighten the uninitiated, we quickly realize that it is within everyone’s reach to write “IF/When I receive your product THEN I pay you”. The speed of execution is also much faster than that of a paper contract, as are real-time updates. Secondly, there is no need to involve external third parties or centralized entities that often contribute to the increase in risk or expense. Third, the automatic execution of the contract, the speed of payment and the minimal fees (up to $0.05 per transaction on average). Problems relating to late payments no longer exist. A person can create a contract as long as he or she has the necessary money on his or her portfolio. Fourth, the contract is transparent and readable by all, secure and the process is totally legitimate.

The only negative point to note about these smart-contracts is that it is impossible to cancel a contract when it is sent for performance. In the event that the contract has been poorly drafted, this can have serious consequences for its creator. The only way today is to use the traditional courts in the event of such a problem.

Want to learn more? The following articles may be of interest to you

The history behind Bitcoin and Blockchain”
“Is Mining profitable?”
“What is mining?”

“Reading a chart”

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