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New hype or a real irreplaceable instrument. Contracts of digital age.

Jul 26, 2018

Currently computer algorithms that work on blockchain are crushing and reforming classic financial systems. However, recently there is a lot more hype surrounding the so called smart contracts. But following this trend, there were a lot of surveys stating that smart contracts are rather vulnerable and unstable instruments. In order to understand the essential thing about smart contracts we should learn a little bit of history.

The term “smart contract” comes from digital currency pioneer Nick Szabo, who created it more than 20 years ago. But to this day, it’s not always clear what people mean under the term smart contracts. According to technical definition, they’re a specific type of contract created and stored on a blockchain, designed to facilitate legally binding, self-executing transactions between parties. The basic idea, Nick Szabo wrote, is that “many kinds of contractual clauses (such as collateral, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make a breach of contract expensive (if desired, sometimes prohibitively so) for the breacher.”

Simply put, they represent any agreement between parties that is stored on and executed by a blockchain (this is the most common conception). A blockchain is essentially a decentralized accounting ledger that uses a network of computers and cryptographical algorithms to track transfer of assets and secure the ledger from tampering. For usual cryptocurrency, that gives two parties, who don’t know each other, an ironclad guarantee that an agreed upon transfer of funds will happen as expected and nobody will be able to cheat.

Smart contracts - that's interesting. With the help of a smart contract, two people are able to create a system that withdraws funds from one person’s account— an uncle, let’s say—and deposits them into a nephew’s account if and when the nephew’s balance falls below a crucial level. And that’s just the simplest example— theoretically, smart contracts can be used to program all kinds of agreements not only financial. You are able to code your own algorithm with own variables.

But wait a minute, technical experts still don’t have a full picture of what a security breach in a smart contract looks like. There are several examples when smart contracts were broken. In 2016 when a hacker stole $50 million from the so-called DAO (Decentralized Autonomous Organization), which was based on the Ethereum blockchain. And in November of 2017 around $150 million suddenly became inaccessible to users of the wallet service Parity, which is also based on Ethereum.

Summing up the above we should say that there is no need to rush into and invest huge sums in unverified technological startups. Check the history, consult with tech-experts and only after that decide whether to invest or not. Offshorelicense is experienced corporate service provider that will help you in all your endeavors.

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