Open Access Research Article
BLOCKCHAIN TECHNOLOGY AND SMART CONTRACTS BY: PRADNYA VIJAYKUMAR PATIL
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BLOCKCHAIN TECHNOLOGY AND SMART
CONTRACTS
AUTHORED
BY: PRADNYA VIJAYKUMAR
PATIL
Roll No. 6
LLM II
Div:-A
Progressive
Education Society’s
Modern Law
College, Pune
Savitribai
Phule Pune University, Pune
INTRODUCTION
What Is Blockchain Technology?
Blockchain technology is a system for
recording information in a way that makes it extremely difficult to alter,
hack, or manipulate. A blockchain functions as a distributed ledger, which
replicates and spreads transactions across a network of interconnected
computers.
In essence, blockchain technology
organizes transaction records, known as blocks, into a series of linked
databases called the “chain.” This network operates through peer-to-peer nodes
and is commonly referred to as a ‘digital ledger.’
Each transaction on this ledger is
verified through the digital signature of the owner, ensuring its authenticity
and protection against tampering. Consequently, the data within the digital
ledger is highly secure.
To put it simply, think of the
digital ledger as a shared Google spreadsheet accessible to multiple computers
in the network. While anyone can view the data, they cannot alter or corrupt
it.[1]
Why Is Blockchain Popular?
Imagine you're transferring money to
family or friends from your bank account. You would log into online banking,
initiate the transfer using their account number, and then your bank updates
the transaction records. It seems straightforward, but there's an underlying
issue many overlook.
These transactions are susceptible to
tampering, which makes people cautious about using traditional methods. This
vulnerability is one of the primary reasons blockchain technology was
developed.
Blockchain is a digital ledger
gaining significant attention recently. So why has it become so popular? Let’s
explore its appeal.
Record-keeping for data and
transactions is crucial in business. Traditionally, this information is managed
internally or passed through intermediaries like brokers, bankers, or lawyers,
which can increase both time and cost. Blockchain streamlines this process by
enabling faster, more efficient transactions, thus saving time and money.
While many people mistakenly use
Blockchain and Bitcoin interchangeably, they are not the same. Blockchain is a
technology that supports a wide range of applications across various
industries, such as finance, supply chain, and manufacturing. In contrast,
Bitcoin is a currency that utilizes blockchain technology to ensure security.[2]
What Is a Smart Contract?
Smart contracts are digital protocols
or programs designed for automating transactions, stored on a blockchain, and
triggered when specific conditions are met. Essentially, these contracts
facilitate the automatic execution of agreements, enabling all parties to
verify the outcome immediately, without needing intermediaries or facing
delays.
The History of Smart Contracts
In 1994, Nick Szabo, a U.S.-based
computer scientist who later developed a virtual currency called “Bit Gold” in
1998 (predating Bitcoin by a decade), was the first to propose the concept of
smart contracts. Szabo described smart contracts as digital tools designed to
enforce the terms of a contract through automated processes.
Although many of Szabo’s predictions
in his paper have become integrated into everyday life, this concept couldn't
be realized at the time due to the absence of the required technology,
particularly distributed ledger systems.
In 2008, Satoshi Nakamoto introduced
blockchain technology in a groundbreaking whitepaper, which made it impossible
for transactions to be altered once they were added to the blockchain. The
arrival of advanced technologies spurred the development of smart contracts.
Five years later, the Ethereum blockchain made smart contracts a practical
reality, and Ethereum remains one of the leading platforms for implementing
smart contracts today.
How Do Smart Contracts Work?
Like traditional contracts, a smart
contract is a binding agreement between two parties. However, instead of paper,
it relies on code to leverage the benefits of blockchain technology, offering
greater efficiency, transparency, and security. Smart contracts operate based
on simple "if/when…then…" statements embedded in the code on the
blockchain.
Here are the key steps involved in
how smart contracts function:
- Agreement:
- The involved parties must agree on the terms and
conditions of the transaction or service.
- They also need to define how the smart contract will
work, including the criteria that must be met to fulfill the agreement.
- Contract Creation:
- Participants can create the smart contract themselves
or work with a provider.
- The contract terms are encoded using a programming
language, and it’s crucial to ensure the contract is secure during this
phase.
- Deployment:
- Once the contract is finalized, it is published on the
blockchain, similar to a regular cryptocurrency transaction.
- The code is embedded in the transaction’s data field,
and after verification by the network, the contract becomes active and
unchangeable.
- Monitoring Conditions:
- The smart contract continuously monitors the blockchain
or an external trusted source for specific conditions or triggers, such
as a payment or reaching a particular date.
- These triggers must be digitally verifiable.
- Execution:
- When the predefined conditions are met, the smart
contract is automatically executed according to the “if/when…then…”
logic.
- This can involve actions like transferring funds to a
vendor or registering ownership of an asset.
- Recording:
- The outcome of the contract execution is immediately
recorded on the blockchain.
- The blockchain verifies the actions, logs the
completion as a transaction, and permanently stores the final agreement,
accessible at any time.
Types of
Smart Contracts
Smart contracts can be categorized
into three main types: legal contracts, decentralized autonomous organizations
(DAOs), and application logic contracts. Here’s a closer look at each:
- Smart Legal Contracts
These smart contracts are legally
binding and follow a structured "if-then" format, similar to
traditional legal agreements. As they are stored on the blockchain and are immutable,
they offer more transparency compared to conventional documents. Parties
involved use digital signatures to execute these contracts, which can be
carried out automatically if certain conditions are met, such as making a
payment by a specific deadline. Failure to meet these conditions could result
in serious legal consequences for the involved parties.
- Decentralized Autonomous Organizations (DAOs)
DAOs are governance structures that
operate through smart contracts, granting voting rights to members. These
organizations are managed collectively without traditional leadership roles
like executives or presidents. Instead, the smart contract’s code, which is
based on blockchain principles, dictates the organization’s operations and fund
distribution. For example, VitaDAO utilizes this model to support scientific
research through community governance.
- Application Logic Contracts (ALCs)
ALCs are coded agreements that
interact with other blockchain contracts and often synchronize with various
applications. They facilitate interactions between devices, such as those in
the Internet of Things (IoT) or other blockchain-integrated systems. Unlike
legal or DAO smart contracts, ALCs are not executed by people or organizations
but by [3]machines
and other contracts.[4]
Benefits of
Smart Contracts
Accuracy, Speed, and Efficiency
Smart contracts are executed
instantly once a specified condition is met. Their digital and automated nature
eliminates the need for paperwork, avoiding errors and time spent correcting
manual documentation.
Trust and Transparency
With smart contracts, there is no
risk of information being manipulated for personal gain, as no third party is
involved. Encrypted transaction logs are shared directly among participants,
ensuring transparency.
Security
Blockchain transaction records are encrypted, making them highly secure against hacking attempts. Additionally, since each entry on a distributed ledger is connected to previous and subsequent entries, altering one record would require changing the entire chain.
Blockchain transaction records are encrypted, making them highly secure against hacking attempts. Additionally, since each entry on a distributed ledger is connected to previous and subsequent entries, altering one record would require changing the entire chain.
Savings
Smart contracts remove the need for transaction intermediaries, thus saving on both the time and fees associated with traditional methods.
Smart contracts remove the need for transaction intermediaries, thus saving on both the time and fees associated with traditional methods.
Smart
Contracts and Flight Insurance
Imagine a real-life scenario where
smart contracts are applied. Rachel is at the airport, and her flight is
delayed. AXA, an insurance company, offers flight delay insurance through
Ethereum smart contracts, ensuring Rachel is compensated for such an event. How
does this work? The smart contract is connected to a database that tracks
flight statuses. It is designed based on specific terms and conditions.
In this case, the condition is that
the flight must be delayed by two hours or more. The smart contract, written in
code, holds AXA’s funds until that condition is met. The contract is then
submitted to nodes on the Ethereum Virtual Machine (EVM), a runtime environment
that executes the smart contract’s code. All network nodes run the code and
must reach the same conclusion, which is then recorded on the distributed
ledger. If Rachel’s flight is delayed by over two hours, the smart contract
automatically executes, and she is compensated. Since smart contracts are
immutable, no one can modify the agreement.[5]
Voting and
Blockchain Implementation with Smart Contracts
The use of blockchain in voting
systems can solve common issues such as identity fraud, miscounts, or bias from
voting officials. By using smart contracts, voting systems can be designed with
predefined terms and conditions. Voters can only cast ballots using their
unique digital identity, ensuring that the counting process is foolproof. Every
vote is recorded on a blockchain network and tallied automatically, without
third-party intervention or reliance on manual processes. Each ID is linked to
just one vote, and validation is carried out by the blockchain network users.
Voting can take place on a public
blockchain or within a decentralized autonomous organization (DAO)--based
blockchain system. This ensures that every vote is securely recorded on a
ledger that cannot be altered, and the ledger remains publicly accessible for
auditing and verification.
Smart contracts allow for flexible
voting systems where members can be added or removed, voting rules can be
adjusted, debate periods can be modified, and majority rules can be altered.
For example, in a DAO, instead of a central authority making decisions, a smart
contract-enabled voting mechanism allows members to collectively vote on
proposals, determining whether they are approved or rejected.
Uses of
Smart Contracts
- Royalty Payments in Media and Entertainment
Emerging artists often depend on
streaming revenue. Smart contract applications can streamline royalty payments
by defining the share payable to the artist and record company. The immediate
execution of payments benefits all parties involved. Additionally, smart
contracts can address the complexities of royalty distribution in over-the-top
(OTT) platforms, allowing new artists and lesser-known actors to receive small,
consistent payments.
- Decentralized Finance (DeFi) Applications
DeFi apps, powered by
cryptocurrencies and smart contracts, enable financial services without
intermediaries. DeFi has evolved beyond peer-to-peer transactions. Smart
contracts facilitate complex processes such as borrowing, lending, and
derivatives trading on DeFi platforms.
- Conversion of Assets into Non-Fungible Tokens (NFTs)
Smart contracts have enabled the
creation of non-fungible tokens (NFTs) by assigning ownership and managing the
transferability of digital assets. These contracts can be customized with
additional conditions like royalties or access rights. Essentially, smart
contracts allow digital assets to be treated like physical ones, holding
real-world value.
- B2B Data Marketplaces
In data marketplaces, users buy and
sell datasets or data streams from various sources. Smart contracts help create
dynamic, fast-evolving markets that automate secure transactions without human
intervention. A prime example of this is Datapace, which uses smart contracts
for such transactions.
- Supply Chain Management
Smart contracts can operate
autonomously without third-party intervention, making them ideal for supply
chain management. An organization can automate the entire supply chain process
using smart contracts, reducing the need for constant oversight. If shipments
are delayed, smart contracts can trigger escalation measures to ensure smooth
operations.
- Digital Identity Cards
Smart contracts allow users to store
reputational data and digital assets, creating digital identity cards. When
linked to various online services, smart contracts let external parties access
important information without revealing personal details. For example, credit
scores stored on smart contracts can be shared with lenders for loan
verification, minimizing demographic profiling. Similarly, job candidates can
share resumes without risking bias.
- Electoral Polls
Voting can occur in a secure
environment through smart contracts, reducing the risk of voter manipulation.
Each vote is encrypted and stored on a ledger, making it nearly impossible to
tamper with. Additionally, smart contracts may increase voter turnout by
allowing people to vote online, eliminating the need to visit polling stations.
- Real Estate
Smart contracts can expedite property
ownership transfers. Contracts can be autonomously created and executed, for
instance, when a buyer pays a seller. The smart contract can automatically
transfer property ownership, ensuring seamless transactions based on blockchain
payment records.
- Healthcare Data Management
In healthcare, smart contracts can
revolutionize data management by improving transparency and efficiency. For
instance, they can ensure the integrity of clinical trial data and help
hospitals maintain accurate patient records. Additionally, smart contracts can
be used for managing appointments and other administrative tasks.
- Civil Law
Smart contracts also have potential
in the legal field, where they can create legally binding business and social
agreements. In certain areas of North America, governments have started to
authorize smart contracts for official documentation. For instance, California
can issue digital birth and marriage certificates as smart contracts.
Blockchain Implementation of Smart Contracts and Crowdfunding
Ethereum-based
smart contracts can be employed to create and manage digital tokens for
transactions. You can design and issue your own digital currency, resulting in
a tradable computerized token. These tokens utilize a standard coin API, such
as Ethereum’s ERC-20 standard, which allows the smart contract to interact with
any wallet for automatic exchanges. This process enables the creation of a
tradable token with a fixed supply, effectively turning the platform into a
form of central bank issuing digital money.
Consider a
scenario where you want to launch a business and need funding. Trust is a
significant factor—people are often hesitant to lend money to strangers. Smart
contracts offer a solution. With Ethereum, you can set up a smart contract to
hold contributors' funds until a specific date or funding goal is reached.
Based on the outcome, the funds are either transferred to the project owners or
returned to the contributors. Traditional crowdfunding systems face challenges
with management and trust. To address these issues, a Decentralized Autonomous
Organization (DAO) can be used for crowdfunding. In this setup, the smart
contract defines the terms and conditions, and each participant receives a token.
All contributions are recorded on the blockchain, ensuring transparency and
trust.
Limitations of Smart Contracts
Smart contracts
are unable to send HTTP queries, which means they cannot access information
about "real-world" events. This limitation is intentional to preserve
consensus, which is crucial for maintaining security and decentralization.
Use Cases of
Smart Contracts
Smart contracts
have a wide range of applications, from simple to complex tasks. They can
handle straightforward economic transactions, such as transferring money
between parties, and more advanced functions like smart access management in
the sharing economy. Their potential to disrupt various industries is
significant. Smart contracts could impact fields such as banking, insurance,
energy, e-government, telecommunications, music, art, mobility, education, and
beyond, offering innovative solutions and efficiencies across these sectors.
Challenges:
- Rigidity and Inconsistent
Support
Modifying smart contracts is
difficult and costly, and global legal adherence can be challenging.
- Difficulty in Capturing
Unquantifiable Data
Smart contracts are better suited for quantifiable data, making them less effective for industries with subjective metrics. - Conflict with GDPR
The right to be forgotten under GDPR conflicts with the immutability of blockchain records. - Skills Shortage
Developing smart contracts requires specialized skills in software engineering and blockchain programming languages like Solidity. - Scalability Issues
Current blockchain networks, such as Ethereum, face scalability challenges, processing far fewer transactions per second compared to traditional systems like Visa.
Conclusion
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Article Information
BLOCKCHAIN TECHNOLOGY AND SMART CONTRACTS BY: PRADNYA VIJAYKUMAR PATIL
Authors: PRADNYA VIJAYKUMAR PATIL
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/09/16
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
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