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The economics of the Digital Transformation – XIV

Providing a distributed network of Oracles is crucial to ensure reliability and security of Smart Contracts. Image credit: Chain Link

Smart Contracts

Once economy moves to the cyberspace as result of the Digital Transformation so need to do contracts. Blockchain link transactions into a trusted flow and process data as they are stored. The decision on what to do with those data can be regulated using “smart contracts”. These mirror the usual paper contracts that regulate economic transactions in the world of atoms. Being included in a blockchain they inherit their traceability and security.

In real life the evolution has been towards the centralisation of contracts. If you think about it, there are laws governing contractual agreements and in case of dispute a “judge” will be called upon to sort it out. The judge, and the applied law, is a centralised authorithy. That was not the case in the remote past when contracts were local, a private business between the two parties entering into the agreement. Clearly centralisation provides uniformity and the intervention of an independent trusted party (judge applying the law). It also, however, introduces cost and delay. The concept of a smart contract, in a way –as it happens with most cyberspace activities- is to go back to the old times with activities being played out and regulated locally, not centrally.

Basically, a smart contract is an “if-then” type of decision. If the price of a good goes below a given thresholds then activate the transaction. If the price of that good does not go below that thresholds then activate a transaction with a different provider… Notice that the decision is irreversible, once taken, that’s it.

So in a way it is a “script” but that should not be seen as a trivial snippet! The “if/then” can actually result from a very complex analyses of the data landscape done using AI algorithms. Also, these decisions may be subject to a learning process.

The interesting point, particularly in perspective, is that beyond the first phase resulting from the shift of actual contracts to the cyberspace and their embedding into blockchain the future can see smart contracts as a fundamental part of the autonomous interactions among different entities, including Digital Twins.

Smart contracts are already a reality in Fintech transactions and they are taking hold in the IoT landscape. Legislations on smart contracts differ from Country to Country and this is something that will need to be addressed.

Oracles

Blockchains can be seen as the tapestry upon which the economic system in the cyberspace will be based. Smart contracts regulates the transactions within the cyberspace but there is also the important aspect of managing the interaction between what is on this tapestry and what is not, like data stored in private data bases, activities that take place in the world of atoms and so on.

The bridge connecting these two worlds, cyberspace and physical world, is provided by Oracles.

Let’s consider an example: you and your friend are fan of two different soccer teams that will be playing a game next Sunday. You of course bet on your team and likewise your friend bets on his team winning the match. You can both agree on the bet and code it into a blockchain. A smart contract will automatically pay the winning party once the match result is final. Now it is crucial that the data containing the information of what teams won is accurate and trusted. What would happen if the data is derived from a website that intentionally or just because of a mistake attributes the winning to the wrong team? The smart contract will pay the person who actually lost the bet, not the one who won and smart contract decisions are irreversible. Hence the need for an Oracles that can ensure the correctness of the data sent to the Smart Contract.

Interactions are based on API, Application Programming Interfaces, and they are so important that someone calls the cyberspace economy the “API economy”.

One of the problem with the API economy is that it is basically centralised. There are a few hubs issuing and managing the API. If for any reasons they fail (hacked, servers are down, company goes out of biz) the impact is huge. This is why it is important to create and run a decentralised Oracles network, like the one provided by Chainlink, a startup that ensures through full decentralisation the reliability and security of Smart Contracts communicating with the physical world via Oracles.

About Roberto Saracco

Roberto Saracco fell in love with technology and its implications long time ago. His background is in math and computer science. Until April 2017 he led the EIT Digital Italian Node and then was head of the Industrial Doctoral School of EIT Digital up to September 2018. Previously, up to December 2011 he was the Director of the Telecom Italia Future Centre in Venice, looking at the interplay of technology evolution, economics and society. At the turn of the century he led a World Bank-Infodev project to stimulate entrepreneurship in Latin America. He is a senior member of IEEE where he leads the Industry Advisory Board within the Future Directions Committee and co-chairs the Digital Reality Initiative. He teaches a Master course on Technology Forecasting and Market impact at the University of Trento. He has published over 100 papers in journals and magazines and 14 books.