Smart Contracts Are Making Their Way Into Blockchain

July 25, 2017

7:15 am

Blockchain has to be among tech’s top stories this year – from the explosion of bitcoin to the numerous initial coin offerings (ICOs) and token sales of blockchain startups that have been happening of late.

There has been a mad rush to explore new business models out of blockchain. The introduction of new platforms such as Ethereum has extended the capabilities of the technology to enable smart contracts which could record and enforce agreements. The potential applications appear boundless.

These new applications are pushing blockchain into the mainstream especially with traditional financial institutions and governments also making efforts in using the technology. However, this also means that certain issues that blockchain has somehow skirted so far such as identity and legality have to be brought into the discussion.

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Blockchain and Smart Contracts

Smart contracts are shaping up to be the next big thing in blockchain. Smart contracts are software that can automate or self-enforce agreements. For example, when used for ecommerce, a smart contract could ensure that delivery confirmations and release of payments can be initiated and tracked over the blockchain. This takes out the need for a third-party escrow service when facilitating peer-to-peer transactions.

Imagine being able to transact other forms of property on the blockchain beyond cryptocurrency. Details and progress of agreements can be stored in the blockchain providing transparency for all parties. This creates a potential for properties of higher value such as real estate and automobiles to be transacted over digital platforms.

Some, however, caution to pump the brakes on such applications of blockchain and with good reason. Despite increasing adoption, many of blockchain’s applications are still unregulated. Laws in various territories still have to fully cope with developments in financial technology. There is no assurance that smart contracts will be legally binding and in which territories will they be acceptable.

Fortunately, blockchain has started to make headway in this regard. Bitcoin enjoyed acceptance as a legal payment method by Japan. Others like Russia seem to moving towards the same direction. Sweden is also testing the use of blockchain for its land registry indicating willingness by forward-looking governments to explore the viability of the technology.

Pseudo-Anonymity and Identity

But as with anything regarding money, property, and value, there’s always a concern regarding security and legality. For smart contracts to be binding, real identities must be associated to transactions. However, some may be led to believe that because transacting bitcoin doesn’t require personal information, blockchain is anonymous. Anonymity in blockchain is a common misconception. Rather, it’s pseudo-anonymous. Blockchain transactions are traceable.

In this regard, the association of bitcoin to cybercrime and the dark web isn’t helping with some people’s perception of blockchain. The recent wave of ransomware attacks like Wannacry explicitly demanded ransom to be paid in bitcoin leading some to believe that blockchain is subject to misuse and corruption. In the case of Wannacry, no ransom has been reported to be cashed in yet since it risks the transactions getting back to them.

Certain implementations of blockchain especially for smart contracts involving real-world properties should therefore require identities to be associated with such transactions. For instance, one blockchain startup, Agrello, offers a platform for legally binding smart contracts. The idea behind the service is using blockchain and AI to create and manage smart contracts.

Legal Acceptance

Agrello, – currently in the middle of its own ICO – enables users to create smart contracts designed to abide by legal standards without needing legal backgrounds or coding skills. As such, identities and signatures must be part of the procedures. The company recently partnered with Chinese blockchain firm ViewFin to jointly work on a shared digital identity engine.

According to Agrello's’s CEO Hando Rand “Proving who you are is literally the first step when formalizing an agreement, all the more so in a trustless public blockchain environment.”

What we are seeing then is the movement of blockchain towards the mainstream. Several other startups are embarking on similar directions. Wave together with Barclays successfully facilitated a trade finance transaction using blockchain. Wave uses the technology to record bills of lading. IBM is building a blockchain for a European banking consortium that includes Deutsche Bank and HSBC.

In these cases, it’s critical for users to be associated with their real identities. Blockchain smart contracts still have to conform to accepted legal procedures for them to have any bearing in the real world. Concessions such as providing information about a user’s identity must be made. However, since the information becomes part of a distributed ledger, smart contract platforms should be able to provide a level of privacy to users. What Agrello and ViewFin are doing may be the positive step towards a compromise to have a private yet legally binding agreement using blockchain.

Mainstream Acceptance

Our thinking of blockchain must start to move away from the somewhat squalid view of what has become known as its many uses on the web and more as the transparent public ledger technology it is. We must view the technology within the context of its use. For smart contracts, identity is crucial for them to work.

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A New York native, currently dwelling in Berlin. Always been a Luddite, but now embracing the tech world and trying to make a name for myself as a tech journalist.