Blockchain technology is used for self-fulfilling contracts. So far, it has mainly been used for digital currencies such as Bitcoin. This may frighten many, because bitcoin doesn’t have too good a reputation. But the technology behind it is convincing even the financial industry.

Blockchain loosely translated stands for a chain of blocks. Each of these blocks comprises one transaction. When a new block is created, it is appended to the chain according to strictly chronological criteria. The decisive factor here is that this chain is not stored centrally, but on many computers, and every participant or party has access to it.

The most important terms in connection with the blockchain

  • Transactions: Blocks can store any type of transaction in code form. The information resembles the spoken or written word. They can no longer be changed and are therefore traceable at any time.
    Parties: This refers to all participants involved in a contract within the blockchain, for example.
  • Decentralized: The database (the protocol), is not located on a server, but is distributed across many computers. No one has ownership rights to the blockchain. Rather, each party has the same access rights and possibilities. This is why it is also referred to as a neutral system.
  • Transparency: The individual blocks are controlled by so-called miners. Once a block is verified, it is shared on the network and everyone has access to it.

Control through mining

The control of the blocks is an important factor of the blockchain. It is the only way to exclude manipulation and errors. To do this, you need to take a closer look at the blocks. They contain not only the transaction, i.e. a contract or a payment, but also the entire transaction history of the blockchain. This means that each block is linked to the previous block and contains its checksum as well as the checksum of the entire chain. Miners use high computing power to ensure that this data is verified and that no duplicate blocks are created. After verification, the new block is part of the blockchain.

Private and public keys

Since the blockchain is only digital, software is required to participate in it and access the data. This access software is referred to as a wallet. It alone is not enough. The wallet is based on a pair of keys. On the one hand, there is the public key, which is visible to all participants. On the other hand, it needs a private key that serves as a password. This private key is used to sign every transaction.

How secure are blockchain and smart contracts?

The structure of the blockchain and its underlying principle provide the necessary security. The data is transparent, organized in a decentralized manner, cannot be changed and can be traced by any participant at any time. To be able to manipulatively intervene in the chain and thus also in smart contracts, one would have to hold 50 percent of the entire Internet, according to experts. So unlike data that is only stored on the server at the bank, hackers have no chance of harming the participants or enriching themselves.

Another core element aimed at providing the necessary security is the personal key. Only with this key do people have the corresponding rights of disposal. Several nations want to take advantage of this in the land register. They are planning to replace the old card index boxes with a blockchain in order to remove the ground for illegal expropriation. After all, because the title deed is linked to the personal key, only the rightful owner can transfer the property.

What problems do smart contracts pose?

Smart contracts can be used to regulate many eventualities, but by no means all of them. Under certain circumstances, problems can arise that require the intervention of a person or a third party. For example, if the ordered goods are defective or the wrong item was delivered. Warranty and guarantee rights could be programmed, but it would probably be impossible to consider all aspects of the applicable law. In this case, an arbitration board would be conceivable, whose decision would be taken up and executed by the smart contract.

Legal aspects of smart contracts

Another problem is the legal framework, especially for contracts. Preformulated terms and conditions used in many identical contracts are subject to strict requirements under Section 305 of the German Civil Code. Here, therefore, those responsible must pay extreme attention to how contracts are formulated.

The “code is law” dogma, according to which smart contracts are legally binding by virtue of the code alone, is also not so easy to reconcile with German law. In short, written law is still the decisive factor for smart contracts. In Vermont, there are efforts to embed self-executing contracts in the legal system. In this country, however, this is still a long way off. Ultimately, therefore, smart contracts are nothing more and nothing less than tools or programs that execute a contract automatically.

What are the advantages of smart contracts?

Apart from the fact that you do not have to take care of anything else after concluding a contract, smart contracts primarily offer financial advantages. At the end of 2016, the Smart Contracts Report by Capegemini’s Digital Transformation Institute (DTI) gave the first forecasts of how much money consumers can save by using the new type of contracts with insurance companies and banks. The report estimates potential savings of up to 450 euros per year. In the areas of health, motor, household and travel insurance alone, 40 euros could be saved annually per person if only half of the efficiency gains of 19 billion euros worldwide were passed on to customers.

Conclusion: Exciting new world

Smart contracts are still largely a thing of the future. However, IBM, J.P. Morgan, Intel and Wells Fargo, among others, are working hard to ensure that they soon gain a foothold in everyday life. Industrial and service companies have discovered blockchain as the technology of tomorrow and are cooperating under the umbrella of the Linux Foundation. Banks and insurance companies are also on the ball. The foundations were laid long ago. What is lacking and what is currently still standing in the way of a breakthrough are legal issues and, not least, consumer acceptance. Convincing them to swap their files for a digital “something” will take time – until 2020, according to Capegemini’s report.

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