In previous post, we discussed about basic aspects of blockchain. Now, we will talk about areas where blockchain can be used.
Conceptually, possibilities are end-less. Blockchain can be used in any areas where ‘trust’ plays the role. Almost all business transactions in modern times are based on ‘trust’ – two parties agree on certain terms and conditions believing that these terms will be honoured during course of transaction.
Let us start by discussing one by one.
Crypto-currency is digital currency often used as medium of exchange or trade. It helps to facilitate/evaluate transactions over blockchain platform.
So, it supports –
- Decentralized control (as opposed to a centralized electronic money system)
- Public ledger (such as bitcoin’s blockchain) which records transactions
Bitcoin was introduced in 2009. Since then, more than 500+ crypto-currencies are available to trade.
Well, anyone can introduce crypto-currency of his own. That is where it gets interesting.
Consider a scenario where you own chain of retail stores. You want to reward customers for their purchases. Now, instead of paying them in dollars (as cash-backs), you start your own ‘crypto-currency’. Let us call them MYDOs. Now, you can set up mechanism where customers can exchange MYDOs with the goods. As more and more transactions happen in MYDOs, it becomes more and more valuable. You do not have to worry about currency fluctuations/exchange rate risks, as MYDOs will act as base currency for your business.
Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that obviate the need for a contractual clause. Smart contracts usually also have a user interface and often emulate the logic of contractual clauses. Proponents of smart contracts claim that many kinds of contractual clauses may thus be made partially or fully self-executing, self-enforcing, or both.
Let us understand it further.
Smart Contract via blockchain will provide better security at much lesser transaction costs. If you consider traditional business contracts, there are legal, administrative costs associated with it. There is also uncertainly of execution, which is often be followed by litigations in courts. Blockchain guarantees execution of contracts via self-enforcing clauses. Any digital assets (bonds,shares, derivatives for example) can be part of the contract where nodes monitor conditions on which contracts are executed.
The Dao Story
Let us understand Smart Contract concept with example of DAO (Decentralized Autonomous Organization) . DAO is platform to support Ethereum related projects, similar to crowdsourcing.
Here’s how it works:
- A group of people writes the smart contracts (programs) that will run the organization – similar to bye-laws and founding documents which define voting rights, funding decisions etc.
- There is an initial funding period, in which people add funds to the DAO by purchasing tokens that represent ownership – this is called a crowdsale, or an initial coin offering (ICO) – to give it the resources it needs.
- When the funding period is over, the DAO begins to operate.
- People then can make proposals to the DAO on how to spend the money, and the members who have bought in can vote to approve these proposals.
In traditional world , you would need to pay taxes and manage jurisdictions for the same. DAO being virtual in nature does not subscribe to the same since it deals with Digital currency.
Launched in Apr-2016, it raised around $150 MN in funding, much higher than initially expected. On Jun-2016, the attacker managed to drain more than 3.6m ether into a “child DAO” that has the same structure as The DAO. The price of ether (crypto currency) dropped from over $20 to under $13 on same day.
It highlights key governance issue coming in Smart contracts. Who decides in case of escalations or mis-matches ? Answer is – NO ONE . In that sense, the community will resort concensus-based decision making.
Thus, smart contracts represent perfect world of ‘Democracy’ where everyone has a stake in decision making.
DAO community eventually voted to apply Soft and Hard Fork – Soft fork means attacker would not be able to withdraw the funds which he moved to Child Dao. Hard Fork means completely unwinding the theft and returning all ether to The DAO, where it can be redeemed by token holders automatically, thereby ending The DAO contract. All the while, attacker maintained that his position was perfectly legal since it satisfied the conditions of the DAO thus allowing transfer of funds to Child contract.
We will discuss rest of Blockchain applications in following posts.