This article is written by Anubhab Banerjee, from the School of Law, Alliance University. This is an article on blockchains and blockchain-related technology contracts.
Technological developments have led us to a new age. All our day-to-day activities today are in some way or the other associated with the internet. Be it professional work, or studying, everything has been facilitated with the presence of the internet. A drastic change in the technological world has been the introduction of the concept of blockchains. The use of blockchains and the technology associated with them has helped evolve a concept known as smart contracts.
This article will put forth credible information on blockchains as well as the smart contract which are formed with the help of these blockchains.
All of us would have heard about the sudden breaking in of bitcoins in all markets across the world. To break it down into simpler words, bitcoins are a denomination of currency which is non-traceable i.e. if a person transacts using bitcoins the source for such a transaction becomes anonymous and cannot be traced.
Bitcoins have their own advantages though there are certain regulatory disadvantages which they hold with them. Such disadvantages are mainly associated with the level of secrecy maintained in such transactions using bitcoins which makes it impossible even for governments to track them. Hence, this gives rise to a number of illegal activities which are conducted through their use. This is where bitcoins differ from blockchains. Blockchains are something to which we can associate high levels of traceability and security.
Blockchains are nothing but the technology which was responsible for keeping records with regards to bitcoins. Blockchains simply signify a chain of blocks. To help understand it better we should break down the words block and chain.
Block is the digital piece of information which is available online whereas chain signifies the database which is used to store such information.
These blocks i.e the digital pieces of information can be divided into three parts:
- The blocks which store information related to data, time and the amount involved in a particular transaction performed online.
- The blocks which store the information about the people who are participating in a transaction.
- The block which stores such information which helps distinguish a particular transaction from others.
How do blockchains actually function?
Whenever the blocks, mentioned above, store new data about a transaction, such data is added to a blockchain. Though this whole process is broken down into 4 simple steps:
- First of all, a transaction should occur i.e. a transaction has to take place to initiate the chain.
- The transaction must then be verified, with other public records. This job is however left upon the computer in the blockchain network.
- The transaction is then stored in a block. The details of the transaction, the receiver’s digital signature and the sender’s digital signature are all stored in the same block.
- Once the verification process is completed for a block, it should be given a hashtag i.e. a unique identification code to identify the transaction.
After such information is uploaded on a blockchain, such information becomes available for public viewing.
Are blockchains secure?
The next question which arises in our mind is whether such blockchains are secure or not. To understand this we must go a little deeper into how the information is stored in a blockchain. So as soon as a transaction is completed and such data is uploaded under a block, such data is given a particular identification number as discussed already. So the data under every block is stored under a chronological order. As soon as a new transaction is updated it is added to the bottom of the list in its concerned block and the process continues for every new addition.
Here comes the part where blockchains can be considered to be one of the most secured means for the storage of such data. This is because when a transaction or its details get uploaded under a block the hashtag it gets cannot be changed. Once the data has been added at the end of a blockchain, it is very difficult to go back and alter the contents of the block. That’s because every block contains a unique hash for itself which also includes the hash for the previous block before it.
This is where the important part comes in. Imagine a hacker wants to hack your transaction on Amazon and wants to make you pay double of the amount you are required to for purchasing a particular product. For this, he has to alter the code for that particular transaction and in the process of doing so, the identification number for that concerned block will change, while the next block will have the same hash code as before, which makes it traceable instantly. So, if someone wants to do so, he shall have to change the hash codes for every block possible to make it untraceable, which is practically impossible. Such proof being generated instantly does not make the data immune to hacking but what it surely does is makes such activities easily traceable. Thus, hacking such information becomes a big risk for hackers.
Blockchain technology contracts
Now that we have an idea about what blockchains are and how they function, we shall unlock into the concept of blockchain technology contracts. These kinds of contracts are also known as smart contracts.
A smart contract is basically a code which represents self-executing contracts between a buyer and a seller. This code itself controls the execution of the contracts as well as the transactions involved. These smart contracts are trackable and irreversible.
The main purpose of smart contracts is to allow trusted transactions and agreements to be carried out between anonymous parties without the need for a central authority regulating such transactions. The whole concept of smart contracts can be better understood with the help of the following three points:
- They are self-executing contracts with the terms and conditions related to such agreements already enlisted in the codes.
- The inventor of a virtual currency known as ‘Bit Gold’, Nick Szabo defined smart contracts as computerized transaction protocols that execute terms of a contract.
- The transactions executed with the help of smart contracts are traceable, transparent and irreversible.
The basic use of smart contracts is to help its users exchange money, property, shares, or anything of value in a transparent and conflict-free manner without requiring the services of a middle man i.e. a lawyer or a contract analyst, etc.
Advantages of blockchain technology contracts
There are several advantages associated with the use of smart contracts. A few of those advantages are discussed below:
Recording the data associated with the terms and conditions of a smart contract is done in an extremely precise manner. As any omission shall result in transactional errors and thus, there is hardly any manual work involved in it.
Smart contracts provide the terms and conditions associated with them in a very transparent manner. Any person who wishes to enter into such a contract is very well aware of its terms and conditions before agreeing to it.
- Clear Communication
There is no communication or considerations involved between two parties who enter into such a smart contract. Thus, the terms and conditions associated with them have to be very clear to avoid any miscommunication in context with such contracts.
Speed is one of the main features of smart contracts as these contracts exist over the internet and can be entered into in a matter of seconds.
The highest level of encryptions available are used for such kinds of contracts. Hence they are one of the most secured things available over the internet. The aspect of security with respect to blockchains has already been discussed earlier in this article and the same are the features with regards to smart contracts.
As already discussed smart contracts are a derivative of speed and accuracy. Thus, efficiency is a by-product of smart contracts. As already discussed there is no scope for error in such contracts and hence, they can be utilised to their full potential.
- Paper Free
The whole world has started using environmentally sustainable ways for daily operations for quite some time now. As environmental damage is something which is out of repair. Thus, smart contracts are a green initiative towards a greener earth. Smart contracts indeed help reduce the huge amounts of paper that are wasted for the purpose of maintaining written records for contracts.
- Storage and Backup
Another problem with contracts written on paper is its storage and traceability. As firstly these papers end up physically occupying space and at a time when they are required it may even become difficult to search for such documents if not arranged properly. Though, when we consider smart contracts storage, backup and traceability isn’t even a real issue. As all of these documents are available online in the form of blockchains.
Saving in terms of money is a huge bonus which comes with the use of smart contracts. As the costs which would have been required to be paid to the middlemen i.e. lawyers, contract analysts, etc. in the purpose of drafting a contract are reduced to zero.
The high level of transparency and security provided by the use of smart contracts eliminates the risk of any kind of manipulation of such data stored in the form of smart contracts.
- Guaranteed Outcomes
This removes the unnecessary need for litigation or court proceeding because of any discrepancies in the performance of contracts. Smart contracts are structured in such a manner that by agreeing to the terms and conditions of such contract the parties commit themselves to bind by the rules and regulations associated with the performance of their obligations under such a contract.
Scope in the future
Smart contracts are a thing for the future. It is mostly because of the non-complicated procedures associated with them and the ease of use associated with them. Once, such smart contracts become fully operational throughout the world, it’s going to be the reason for disrupting several professionals and their flow of work across the globe. A few of those professionals would include people in the banking sector, insurance, telecommunication, art world, music and film, education and many more.
Right now smart contracts are regarded to be more of a technological development with a lesser amount of legal or regulatory involvement in them. Though, the benefits which are associated with the smart contract are soon going to become the reason for them comes into the big picture. They are something which would be more often than not preferred by most companies and MNCs around the world because of the advantages associated with them as have been discussed above.
The enhanced security and traceability with regards to blockchains associated with smart contracts have already been discussed earlier in this article. Once these companies start regular use of such smart contracts it would be highly convenient for them in handling matters associated with consumer complaints or employee issues. As people would firstly accept the pre-existing terms and conditions for such contracts, which would automatically make them ineligible to reap any benefits out of the transactions if any terms and conditions are not fulfilled. Thus, no liability for the performance of such smart contracts would lie on the companies associated with them.
Smart contracts are not just a thing for the future, as they are already being used in several areas. Though, it is to be seen on how their increased use is viewed by the Governments and other regulatory bodies. As they can be present everywhere from stock-markets to real-estate to agriculture to education and to most other places wherever there is the possibility of a transaction taking place and a contract is being entered upon.
The concept of blockchains is still quite nascent and it will take some time to develop itself and involve more and more people in its use. Smart contracts in today’s date do not have much of a legal context to it, but the legal aspects of small contracts should also be looked upon carefully as at the end of the day they are ‘contracts’. Smart contracts can be considered to be without any loopholes though such is not proved yet as no one has been able to challenge them as such. Maybe in the future people would even come out with certain loopholes which are present in them and that’s when its actual growth starts, with such challenges coming on its way.
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