How smart contracts work?

smart contracts
The smart contract consists of four flows, and when introducing it, the smart contract is implemented on the blockchain using Ethereum, which is a Bridge Smart Contract Development Services development platform that introduced the smart contract. The flow when executing a smart contract on the blockchain is as follows.

1. Contract definition
2. Waiting for an event
3. Contract execution / exchange of value
4. Payment / settlement

First, program the terms and conditions. There are various contracts that can be considered in this contract definition, for example, escrow transactions (payment is automatically executed when goods are received by a certain date) and smart properties (car sharing, share house, etc., once payment is completed). The key is valid only for a fixed period of time). Next, depending on the information of digital assets on the blockchain and the information of receiving goods outside the blockchain, the event will be executed only when the predefined conditions are met. Events are processed by contract terms and exchange of Ethereum and rights (such as car ownership and real estate). In the case of digital assets traded on the blockchain, settlement is completed at this point, but in the case of contracts to exchange physical assets such as cars and real estate, we will confirm the actual thing and complete the transaction.

Three benefits of smart contracts
The realization of smart contracts enables the execution of all contracts without the need for an administrator to mediate the contract. This will realize the world of “Decentralized Autonomous Organization” (DAO) where all transactions are carried out autonomously and decentralized. There are three benefits to realizing smart contracts and DAOs.

1. The trust cost of the contract partner is reduced
2. Reduces contract fraud
3. Contract fees are reduced

In a traditional transaction, the seller cannot complete the transaction without confirming that the buyer has paid. However, with smart contracts, contracts are concluded only when each other meets predetermined conditions, Cross chain bridge development so there is no concern about unpaid payments. Therefore, for example, simply executing a smart contract that “automatically transfers the right of the owned real estate when payment is completed” guarantees a highly reliable transaction. Since this contract is programmed and executed automatically, it is not possible to artificially tamper with the contract contents, and Ethereum can save the smart contract on the blockchain and check the contract contents and execution status even afterwards. It also has the advantage of being less prone to fraud. In addition, since no intermediary is required for such a series of transactions, the fees related to the contract can be reduced.

Three challenges for smart contracts
While smart contracts have these benefits, they also have problems. Here, let’s take a closer look at the three issues of smart contracts, taking into account the incident that occurred in Ethereum.

1. Legal issues
2. Privacy issues
3. Difficult to verify vulnerabilities

Legal issues
Since services using smart contracts are new services that do not exist in the existing framework, legal development is currently underway in various businesses. Since smart contracts are services that use virtual currencies, the existence of the revised Funds Settlement Law cannot be ignored. The revised Funds Settlement Law recognizes that virtual currencies have property value and requires compliance with the Act on Prevention of Transfer of Criminal Proceeds when handling virtual currencies. As a result, cryptocurrency exchanges are obliged to notify the Financial Services Agency when there is a suspicion of money laundering based on user attributes, transaction status, and other information necessary for transactions.

Regulations and legislation may only give a negative impression, but these frameworks are being promoted to prevent fraud and transfer of profits to criminal organizations, protecting investors as well as users. Is for. While smart contracts are an epoch-making mechanism, they are contracts that are legal acts, so what kind of legal problems the smart contract service that you are paying attention to has? You will always need to have.

Privacy issues
Since smart contracts are programs developed on the blockchain, the high degree of openness and transparency that fraud is not performed, which was also an advantage of smart contracts, is synonymous with the fact that traders and transaction details are open to the public. is. Of course, it is difficult to strictly associate a specific individual with a trader, Build a cross chain bridge but it should be kept in mind that it is not completely impossible to identify a trader from past transaction information.

In addition, since smart contracts will be accompanied by contracts, smart contract service providers must establish a correct privacy policy in advance regarding the handling of personal information. According to Article 15 of the Personal Information Protection Law of Japan, “1. When handling personal information, a business operator handling personal information must specify the purpose of use (hereinafter referred to as” purpose of use “) as much as possible. (2) When changing the purpose of use, a business operator handling personal information must not go beyond the range reasonably recognized as having a considerable relevance to the purpose of use before the change. It is stipulated. Although it is the part that overlaps with the first issue, it is also a point to determine the service whether it clears these laws.

Difficult to verify vulnerabilities

Smart contracts automate transactions through programs stored on the blockchain. This program, of course, is developed by the implementer, but there is a problem that it is difficult to verify the validity of this code. Users of smart contract services trust the provided smart contracts, and once stored on the blockchain, smart contracts have been stolen in large numbers by exploiting vulnerabilities in uncorrectable DApps. It cannot be said that an event like The DAO will not happen.