Smart-contracts and Block-chain technology

‘Blockchain’ is a hot word in financial technology at the moment.

I’ll be honest, I didn’t really know what the word meant until a few weeks ago, when I had a bit-coin veteran break it down for me. Essentially, Blockchain is a massive statement of all the transactions on a specific network. The blocks, think of them as a bank statement, are ‘chained’ together to create a cohesive document of every single transaction that has occurred on a specific currency, the most popular instance is Bitcoin. According to the World Economic Forum, 10% of global gross domestic product is now stored on blockchain technology.

So how do smart-contracts fit into this?

Smart-contracts are heavily based on the theory of asymmetric information. When one party has more information than the other, perhaps they know that the buyer will have trouble getting the money back if the product is performed to a poor standard, an asymmetric information issue arises. Smart-contracts are used to negate the issues of asymmetric information and other issues.  Put simply, a buyer might want to increase his websites Google SEO rankings. He contacts a marketing agency to ensure that he is placed third for the key-word “banking”. They both agree on a price and initiate a smart-contract. Essentially, the money is stored in a block that is inaccessible by either of them until the buyers company is ranked third for the SEO key-word he asked for. If they disagree, both parties decide a third-party mediator to decide whom the money should go to.

It’s a relatively simple concept with a lot of potential for financial technology in the future. It has opportunities to be used in bonds, shares, derivatives, and many other financial instruments where the event can be encoded into the smart-contract. Think about the potential that this sort of contract could have if it was available to the retail market? A financial industry without any inefficiency or risk of financial intervention by a third-party intermediary.

Simply put, it’s an escrow system that is “smart”. It can be programmed to watch for specific events, and if they are carried out, it can release money. The moment a company turns a profit for the financial year, the respective smart-contracts can instantly release a dividend to their share-holders.

The two largest limitations is that it has no notion of state. A project is not “completing”, it is either incomplete or complete. This might have issues for more sophisticated financial instruments or technology, but it is certainly an interesting field to watch over the next few years. These have a possibility of completely revolutionising financial technology!