Blockchain-based "New Value Change Lead by Smart Contracts"

[Special series] Special contribution on banking IT trend : part3, Blockchain-based : New Value Change Lead by Smart Contracts

1. Smart Contracts, Creating New Value

Smart Contracts, the Future Blockchain

Historically, the enforcement of arbitrations and penalties in violation of contracts has always been within the boundaries of a state or institution. However, the Blockchain technology, in which all participants in the network jointly validate, record and store transaction information, presents new alternatives for the protection of contractual rights and property rights. Nick Szabo, a programmer in the United States, termed 'smart contracts‘, and defined this as ‘a set of promises, specified in digital form, including protocols within which the parties perform on the other promises.'

Blockchain-based smart contracts auto-execute the process of contract fulfillment and verification through networks, without need for a third-party intermediary and at no additional cost. Complex business contracts can be executed securely with low cost and method by which parties can agree upon terms and trust.

New Value Change Lead by Smart Contracts

It is no exaggeration to say that Blockchain-enabled smart contracts can virtually be applied to any existing financial services area. Not only primary services area as currencies made from the existing Bitcoin-based Blockchains and payment method, but also assessment of all goods, including tangible/intangible assets, and all transactions related to value lifecycle, will be connected to smart contracts system.

2. Use Cases

Features of Use Cases

Smart contracts are most effective in the service area that everyone can trust, according to established procedures predictable as per mutually agreed rules based on the same pre- or post-proof of work. Typical business areas suitable for applying smart contracts are as follows: ones with ① frequent inter-company transactions and verifications, ② sensitive data ownership and security ③ work available for automation ④ IT system that can be expanded and streamlined.

Finance

While Blockchain 1.0 focused on payment, including movement, transfer, and processing of net capital without intermediaries, Blockchain 2.0’s service has expanded to pre- and post-work processes covering the contents of related contracts, including the transfer of funds between parties transacting; It is expected to P2P-based contract system based on auto-execution under smart contracts between the parties to a transaction.

Intellectual Property Right

Blockchains can protect intellectual property such as copyrights and contribute to eradicating piracy fundamentally by managing ownership and transparently sharing information on purchase of sound source. Furthermore, if the intellectual property rights are registered with the smart contract, and the payment is received as soon as users pay for them, unnecessary intermediaries are eliminated and whole process becomes more streamlined—thus making the transactions more effective.

Sharing Economy

Blockchain-based smart contract can be a key to solving the problem of complementary and trust, the limit of the sharing economy. When a thing executes smart contracts by itself with a vehicle or a house linked to Blockchains and a combination with IoT, a direct transaction between users without an intermediary is realized. Likewise, Blockchain-enabled sharing economy can distribute all profits except overhead to participants.

3. Smart Contracts on Blockchain

Contracts on Bitcoin

The Bitcoin script language is a stack-based execution language goes through minimal processing to prepare agains Ddos and other hacking attacks, and is not designed to process the complex work (recursive logic process such as for and while) that the latest programming languages can perform. Developers of Bitcoin ecosystem, however, never stopped their effort to improve transaction flexibility and scalability, and some significant results emerged that led to the development of smart contracts.

‘Colored Coins’ is an attempt to isolate Blockchain technology from virtual money and combine it with other fields to enable various asset transactions. ‘ Open Asset Protocol(OAP)’ , Colored coin type , led the discovery of new Blockchain-based use cases—stock issue, point conversion transactions and so on; ‘multi-signature’ refers to requiring a number of private keys to withdraw Bitcoins stored at a specific address. Usually when there are n private keys, m signatures (less than n)are required for the withdrawal. This process has contributed to improving the convenience and security of Bitcoins’ transactions.

Ethereum

Ethereum, representative of Blockchain 2.0, is an open platform that considers Blockchain as a single database, where all assets can be uploaded and the way each asset moves or is transacted can be programmed directly.

Unlike Bitcoin, which supports the self-edited script language, Ethereum supports a separate, independent , Java-based language called Solidity—its own Turing language—which allows virtually any type of transaction to be programmed. As a result, a high degree of freedom and efficiency at a completely different level is ensured.

In addition to developing financial applications through Etherium technology, there are also new attempts to develop quasi-financial applications and to implement a decentralized form of autonomous organizations and companies.

Samsung SDS Blockchain Smart Contracts

Samsung SDS’s Blockchain platform is designed to enable dynamic processing based on dynamic data reference through the use of dynamic transaction parameters that are easier to apply and secure, while still referring to existing Blockchain architectures. The most powerful advantages of Blockchain-based Bitcoin—security, stability, and integrity—are secured. Ethereum Virtual Machine (EVM) in Blockchain-based Bitcoin is implemented, taking advantage of benefits from existing Blockchain technologies, for executing smart contracts.

Smart contracts on the Blockchain platform allows connection to business rule based Blockchain services with specialized functions of new business models and automated transaction processes, enabling quick rollout of services and products; it is designed to facilitate formation and support of global platform ecosystem regardless of type of business, channel and region.

4. Use Cases in Financial Services

Smart Contracts on Insurance

Insurance industries heavily depend on complex interface processes through different external business processes for the identification and verification procedures of various stakeholders, for example, claims processing for indemnity insurance involves an insurance policy holder, insurers, damage assessment, maintenance companies, hospitals, and judicial institutions. Therefore, the time and expense required for the whole process were relatively high.

Forging the same evidential documents shared by people involved in claims processing, which is mutually agreed upon through Blockchain, is impossible. Furthermore, the self-executing processing with smart contracts enables Blockchain-based work that is linked to be processed quickly and accurately without leakage.

When smart contract source code ID in Blockchain meets the self-executing conditions, it is automatically executed in Blockchain using the reference parameter data existing in the safe zone through virtual execution environment without any user intervention. The resulting value is shared between all participants in real time, thereby a joint Blockchain ecosystem is created.

Smart Contracts in Bank

At Barclays Accelerator held in London in April 16, Barclays Bank demonstrated the interest rate swap by applying the standard contract of International Swaps and Derivatives Association, ISDA, using Blockchain-based smart contracts. Through the real-time confirmation and verification between contracting parties on the contract documents, the smart contract was automatically executed at the Swap event. This marked the start of the first Blockchain-based smart contract for a bank.

After defining the key terms on the screen, the standard contract is automatically created and registered in Blockchain. Not only does it drastically improve verification and collaboration bases through contract execution by real-time confirmation from the contracting party, it increases the reliability of documents and transaction records that only Blockchain has.

After the contract is automatically created, the parties concerned mutually confirm the same document based on the contract document shared through Blockchain and give the final confirmation. Its status is immediately delivered to the contracting party through Blockcahin. Finally confirmed between the parties, the transactions are automatically executed and managed in accordance with the smart contract at the exercise date.

Principal Consultant, Nyunsoo Hyun
Principal Consultant, Nyunsoo Hyun IT Technology
Samsung SDS

This article introduces the concept and value of a smart contract, its implementation through Blockchain technology, and application opportunities in financial industry.

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