Fintech Security

What Are Smart Contracts Replacing and Why Are They So Revolutionary

Year in, and year out, people continue to wonder how long the crypto hype is going to continue. The volatility of the market and the crashes it has faced keep leading some to believe that the digital currency’s time has come to an end. But without fail, it always pops back up again… why?

This month at The Fintech Times we’re going to be looking at what makes digital currencies so popular. We will also be uncovering the emerging alternatives to cryptos and uses of blockchain technology. Plus, why the digital future looks so intriguing.

This following week we will be looking at smart contracts, starting today with insight from Injective Labs, Quanloop, Insurist, Sooho.io and Planet IX.

Paradigm shift
Eric Chen, CEO and co-founder of Injective Labs
Eric Chen, CEO and co-founder of Injective Labs

According to Eric Chen, CEO and co-founder of Injective Labs,  a research and development company focused on creating unmatched decentralised finance solutions, smart contracts are revolutionary because they effectively alter the way in which users can enter into and execute an agreement.

In any agreement between two or more parties, there are terms that need to be created, typically an arbiter to oversee the legitimacy of said agreement, and trust that the agreement will be executed upon.

But, users are prone to human error. Structuring terms can cause friction, an arbiter can sometimes be an unnecessary figurehead. Trust can not only be subjective, but also broken.

“Smart contracts replace the need to have a trusted intermediary when there is a transaction to be made by allowing the trusted intermediary to be coded logic and allowing for code to be law,” he says. “They eliminate any ambiguity when it comes to a transaction being executed as the user trusts the code to carry out the terms and can accelerate transacted activity to a massive degree.

“In its origin, smart contracts helped to carry out one transaction between two parties. But as the technology and industry continues to grow, we now see smart contracts not only carrying out a transaction, but that transaction being logged, verified, and validated across multiple networks, not just the blockchain on which it was executed.

“Smart contracts are bringing forth a true paradigm shift. There are contracts being utilised every day such as for mortgages, rents and financial transactions. Over time all of these transactions will occur on decentralised blockchain networks such as Injective given that smart contracts are flexible with native transparency and trust for all.”

The new ‘vending machine’
Valentin Ivanov
Valentin Ivanov, co-founder at Quanloop

For Valentin Ivanov, an Estonian finance expert and fund manager of investment firm Quanloop, smart contracts are not exactly a novel concept.

“Smart contracts are not new — in fact, people often point to vending machines as the first kind of technology analogous to smart contract implementation,” he suggests.

“Although not new, smart contracts are still revolutionary because they may cut down on the need for third-party mediation, the expense of legal disputes, the damage done by fraud, and the likelihood of unintentional or deliberate violations. There is no requirement for a trusted third party to authorise the smart contract’s execution.

Smart contracts work in cases where there is no need for a neutral third party to verify the agreement, such as in the trading of OTC derivatives or the carrying out of a contract when any changes will be noticed. Commonly connected with cryptocurrency, smart contracts are a cornerstone of Ethereum’s decentralised finance and NFT applications.

For example, a smart contract might be used to transfer ownership of the property upon the deposit of the agreed amount into a bank account. This would work well in a self-executing contract where the action will be performed after certain conditions are met. Due to the direct nature of the payments enabled, no other parties are needed to effect the transfer of cash.

Airlines may employ smart contracts to build passenger rights settlement systems, with compensation being paid out automatically in the event of a delay.”

Fair and efficient
Felix Bengtsson Planet IX
Felix Bengtsson, chief marketing officer, Planet IX

Felix Bengtsson, chief marketing officer of WEB3 NFT-based strategy game Planet IX is also on board with the vending machine comparison. “You plug in a token, stuff happens in the black box, and out comes a treat. The main point here is that it doesn’t matter who you are, as long as you plug in the token, you get your treat.”

He also says smart contracts will “replace the legal clerks, the back office of financial institutions and insurance agents”.

“What used to be more or less arbitrary decisions by corruptible humans will in the future simply be settled by the code in the smart contract regulating the relationship between a customer and the service provider. This is how the world should run. Fair and efficient. There are countless examples of such transactions that we perform everyday – but that today requires some human to make a final decision, to file that paper, to move that money, to assign that ownership.

“All this and more can and should be handled by transparent and permissionless code. This is the world that smart contracts promise.”

Better protection
Brian Greenberg
Brian Greenberg, CEO, Insurist

Smart contracts remove the need for middlemen, explains Brian Greenberg, CEO and founder of insurance firm Insurist. “This means that you can do business with anyone in the world without having to worry about getting ripped off or losing money to a scam.

“You can set up a smart contract so that it only happens once certain conditions are met, which means that no one will be able to take advantage of you or your business.

“Smart contracts are so revolutionary because they allow us to do business with people we don’t know, and they make sure that both parties get what they need out of their transactions.

Bolstered security

When implemented well, smart contracts result in greater security and transparency, says Jasper Lee, audit tech lead at DeFi infrastructure service provider Sooho.io. “With the rapid rise of DeFi in recent years, we’ve seen a corresponding rise in security challenges, as hackers target vulnerabilities in such platforms and protocols.

“With record-breaking funds stolen from DeFi platforms in 2022, we could even describe the security situation as severe. That said, the wide majority of smart contract vulnerabilities are easily avoided. Our suggestion for firms exploring DeFi opportunities is to ensure that comprehensive security audits are undertaken and that the recommendations from those audits are fully implemented.

“We hope the industry can commit to greater implementation of security checks to achieve greater success in this field.”

 

 

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