Financial Idiot 008 - Let's dig into Crypto! Part 2 - Smart Contracts
This Blog Post was originally distributed by the Newsletter "Financial Idiot". You can find and subscribe to it here.
DISCLAIMER: I'm an idiot and this isn't financial advice! You can lose money when investing, and you should never invest money you don't own or you can't afford to lose. I'm not responsible for your decisions!
Everybody deals with contracts regularly. To receive energy, you need a contract with an energy provider. To handle what your relatives will be doing after your death, you need a last will, which is also a contract. Welcome to a new issue of "Financial Idiot ".
In Austria, there aren't general formal requirements for contracts. You can make Contracts by talking to each other or writing down the Contract and signing it. You can also go as far as consulting a lawyer or notary to get an approved signature. However. Why on earth would you need a "Smart Contract "?
I don't think I have to say that every Contract can be broken by one of the parties signing it. Of course, that might lead to a lengthy lawsuit. What if there was a way to define a contract so it can't be broken? For example, if it is immutable and executed by a third party (in Austria, that's one of the main jobs for notaries)?
With Blockchain and Smart Contracts, this third party can be the blockchain. As we learned in the last issue, you can't manipulate a blockchain and thus can't alter a contract on that blockchain. Of course, smart contracts can have problems (bugs and unseen problems), but "regular "Contracts can have issues too.
I thought a while about a typical example for a Smart Contract, but I settled on a more interesting one:
Let's say Bob and Alice think about investing in a Project. Neither Bob nor Alice have enough funds to invest on their own, but both of them together would reach the threshold of the project. For simplicity, I'm leaving values out, assuming the share of Bob and Alices' money are the same (50:50).
They both know they could make a contract and even let a notary cross sign it. After that, the project succeeds and delivers a monthly income for the investment. The notary that cross-signed the Contract takes the money each month and splits it 50 to 50 for Bob and Alice. Great. On every split, the notary takes money from the income as a fee for his service. Not so great.
Let's say the project the two people want to invest in is a blockchain project, and it is on the same network where Bob and Alice can deploy a Smart Contract. Both put money into the Contract, and the Contract (as programmed) invests that money into the project. Every month the Contract receives the money and splits it for Bob and Alice to retrieve, thus building a trustless third party.
Just with the notary Contract, Bob and Alice must agree to the Contract's content. On the notary side, it is written words. On the Smart Contract side, it is Source Code.
To get things even more secure, Bob and Alice could implement an algorithm that ensures both of them always have to "sign "for a specific transaction the Contract executes. That is referred to as Multisignature.
Of course, the above example is probably one of the most basic forms of a Smart Contract. Add a few more people to the mix with different investing amounts, and you get a DAO. A decentralized autonomous organization. I'm not going deeper into this topic as it would blow apart this newsletter easily.
And again: "Crypto is dead ". No, it isn't. You didn't think about the full potential yet.
Recently I was asked if it is already the time to buy into Crypto since everything is red now. I answered: "I don't know, I'm regularly buying. You know what they say: Time in the Market beats timing the Market ". I'm going to explain that sentence in the next issue. I don't know that sentence? Well, you will have to wait until the next "Financial Idiot" issue.