Russian Smart Contract Lunch at the Blockchain Table

Paul Goncharoff

A client (for this narrative I will call him Igor) from a central Russia region breathlessly phoned me after this past Thanksgiving weekend to say he was in Moscow and urgently needed to meet. My mercantile brain kicked into gear, and we agreed to lunch at a fine restaurant on Tverskaya Street. To make a long story short, he had a board meeting two days earlier and was “ordered” to get the company geared up to employ blockchain smart contract applications to reduce overheads and improve efficiencies – immediately.

I felt for him, as this was a fork-in-the-road situation that can make or break careers in the structured corporate world. There are few if any second chances, especially in the classical Russian cultural mindset. Before we even got to the appetizers, he bared his soul to me…. “What in the hell are smart contracts? How can any contract be smart, isn’t that why we have our lawyers?” Bottom line, I tried to explain to him what smart contracts were, which was an exercise in itself as I am (as he is) a self-confessed analog newbie in the digital world.

Not long ago I wrote an opinion piece of my first experience inbeing paid with crypto-currency. I therefore hoped my very basic overview was not too confused or unclear, especially when charging several ETH’s for this consulting luncheon explanation attempt.

The concept of a smart contract is not new; in fact, it predates what today we call the “blockchain” in the IoT (internet of things). In 1996, more than 20 years ago, computer scientist Nick Szabo wrote; “A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on the other promises. The basic idea of smart contracts is that many kinds of contractual clauses (such as liens, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher.”

More recently in 2014, Vitalik Buterin the founder of Etherium stated: “A smart contract is a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in, and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated.”

For example, two persons have a 1 ETH wager and decide to settle it through a smart contract. One says that on December 25, 2018 at 1400 hours local time the temperature in central Moscow city will be lower than minus 20 degrees Celsius, the other says it shall be above. A smart contract is programmed with the given parameters, both parties enter their relevant e-wallet addresses, the sum at stake and electronically seal the deal via an agreed upon “oracle” (more on this later).

Automatically on December 25that 1400 hours, the programmed smart contract autonomously gets the needed temperature input from the Moscow meteorological service and the 1 ETH is immediately debited from the loser’s wallet, and credited to the winner’s wallet. After the initial programming and agreement, it became an autonomous function fully embedded and operational on the blockchain ledger.

Therefore, what is a smart Contract? A “smart contract” is a set of coded computer functions. It may incorporate the elements of a binding contract (e.g., offer, acceptance, and consideration), or may simply execute certain terms of a contract like the above wager. It permits self-executing computer code to take actions at specified times and/or based on reference to an action or the absence of an action or event (e.g., delivery of an asset, weather conditions, or change in a reference rate).

What is so smart about a smart contract? This is what leads to some confusion, as a “smart contract” is not necessarily “smart.” The functional operation is only as smart as the information feed it receives and the machine code that directs it. In various jurisdictions, a “smart contract” may not (yet) be a legally binding contract. It may also be only part or subset of a broader contract, depending on your wishes and instruction.

Smart contracts use digital signatures – private cryptographic keys held by each party to verify participation and assent to agreed terms. Smart contracts use “oracles” – a mutually agreed upon, network- authenticated reference data provider (potentially a third-party); this is a source of information to determine actions and/or contractual outcomes, for example, commodity prices, weather data, interest rates, or an event occurrence. A smart contract can self-execute, it will take actions, e.g., disperse payments, without further action by the counterparties. Smart contracts can be stored and executed on a distributed ledger (blockchain), an electronic record that is updated in real-time and maintained on geographically dispersed servers or nodes. Through decentralization, evidence of the smart contract is deployed to allnodes on a network, which effectively prevents modifications not authorized or agreed by the parties.

Blockchain is a continuously growing database of permanent records, “blocks,” which are linked and secured using cryptography.

Smart contracts are part of an evolution to automate processes with machines and self-executing code. Examples of varying degrees of complexity are seen daily as automation further embeds in daily life, such as ATM’s, Automatic bill paying, Touch-to-pay systems, instant money transfer apps, and so forth.

Smart Contracts will see growing uses in financial market operations, and likewise may be useful in a variety of other areas as well. Examples include automated payouts of dividends, stock splits, tracking product movement, streamline payments, facilitate lending and liquidity.

In the insurance or gaming industries, the ability to generate automatic and automated claims processing based on specified events. With IoT enabling, vehicles/homes/farms/factories could execute claims automatically.

Currently at this stage of development and acceptance as with any new technology, there are technical and cybersecurity risks. They are pretty much the standard bouquet: Unintended software vulnerabilities. Human error (Garbage in Garbage out – GIGO), Technology failures – internet service can go down, user interfaces may become incompatible, or computers/servers can stop working. Scaling or bandwidth issues. Divergent/Forked Blockchain where such infrequent events can create multiple smart contracts where only one existed, or may disrupt the functioning of a smart contract. Unforeseen or unanticipated future events that shock and/or stress the technology. Oracle failure, disruption, hacks or other issues with the external sources used to obtain reference prices, events, or other information. In short, nothing new or unexpected that has not affected just about every new technology at some point in its development and implementation.

Poor Igor had a glazed look and perspiration on his upper lip, while throughout lunch the strongest drink he imbibed was mineral water. “So which smartasses are specifically using these smart contracts in Russia?” he asked. I ticked off a few simple ones:

The aviation fuel operator of parent company Gazprom Neft has made history as the first firm using smart contracts on blockchain in the Russian aviation market. Their function is to allow airlines immediate payment processing at the moment of re-fueling, without pre-paid charges or bank guarantees.

So what’s the big deal you might say? Under the existing, expensive, prone to errors and labor intensive paper-based processes, airlines are forced to make a pre-payment to banks without knowing all of the existing variables , i.e. the routes its aircraft are taking, and exactly how much fuel will be needed to name a few uncertain items. In addition, under the old system their funds are also frozen for appreciable periods. In the new process, the distributed ledger technology (DLT), commonly also known as blockchain, to allow transactions, or smart contracts, made in bitcoin, or other cryptocurrencies, to be recorded publicly on a database. This transactional information is then automatically shared between nodes throughout a network of computers. This cuts costs for both airlines and suppliers.

DLT significantly increases the speed of financial transactions and in doing so reduces work force and labor time-waste costs for both airlines and suppliers adding efficiency and transparency to the process.

The globally famous Tretyakov Gallery in Moscow, Russia, has launched a blockchain-based art patronage scheme. “My Tretyakov” that allows individuals and enterprises the laudable opportunity to make small (or large) donations and become patrons of specific artworks. The money collected is then used for the digitization of various items in the gallery’s huge collection. This concept was developed by the gallery together with RDI Digital, a Russian business innovation collective. They intend to make use of blockchain technology to eventually assist with assigning and managing their entire patronage structure. The system randomly selects which storage unit (electronic copy of an object of art) will be considered digitized with the help of a particular patron, and links the patrons name to the object. The connection of the name or company name to the digitized exhibit is fixed using blockchain technology.

This example is not the first where art and blockchain meet. Earlier this year, the world’s “first” cryptocurrency art auction was held. This was for the fractional ownership saleof “14 Small Electric Chairs”, an artwork estimated to be worth over $5 million in equivalent dollars, by the artist Andy Warhol. The “fractional ownership” is enabled by smart contracts, and thus in time will form the basis for a liquid onward trade market using crypto-currencies.

In a different market, there is the hugely popular “bike rental” service enabled by smart contracts throughout Moscow. Two years ago, this was unheard of, today there are over 50 fully automated pick-up and drop-off points all over central Moscow that are keyed to smart contracts on the blockchain.

The Internet of Things has brought us an era of everyday devices having the ability to connect with the Internet, and therefore to blockchain systems like smart contracts. The Russia Postal systemand the many interconnected private e-commerce service companies and vendors are a recent and fast growing example.

Starting from placing your initial order through your handheld or laptop device, with tracking and monitoring sensors every step of the way – from the shelf in the vendor’s warehouse, to your doorstep. A fully self-automated system of sensors plays out their role. Each sensor forms its own node on a blockchain and Smart contracts record “possession” of the physical order to each individual sensor (and subsequent location). A barcode, NFC chip or other tracking device on the package is read at each sensor on its journey to your house. Each time it is read by a new sensor, its location is broadcast to and agreed on by all the IoT participants on the blockchain.

As each recording of the package’s location is encrypted into the blockchain in a specific order, there is no securer system for tracking packages. A smart contract then keeps tabs of “possession” all the way along the line, solidifying the trust of exactly where to find the package at its specific place and time.

Not too long ago mainframes were the cutting edge of the IT world and most geeks at that time were “online” via teletype machines. Then the PC and Internet era arrived and almost overnight, the mainframes became obsolete and unwieldy. Today we have continued to progress exponentially ever faster with the growing inroads of blockchain technologies such as smart contracts.

It is now widely believed most financial institutions will have to replace their existing internal IT infrastructure to enable full adoption of blockchain and the attendant digital currencies. The key reason is that the current “in-house” IT infrastructure of many commercial entities must differ architecturally to accept and exploit crypto and blockchain. This is proving to be true as the core data use in many companies is too different, in most cases, making them unable to work directly with blockchain and crypto, the basis for smart contracts, forcing new IT investment, or outsourcing to a third party with available bridging capabilities.

In this respect, many of the new startup companies that have emerged together with blockchain have a big advantage as their IT architecture was built with blockchain applications in mind, and not having to retool, reprogram and rethink their current systems from their foundations.

Another example is the Moscow Exchange (MOEX), which is now preparing infrastructure that will allow companies in Russia to conduct Initial Coin Offerings (ICOs), and expects to be operational by the new 2019 year provided there is sufficient demand from investors. This is a caveat, which given the trend seems rather conservative, but then again Russia has a saying: “Measure it twenty times, and then only cut once”.

How did the lunch end with Igor? He seemed satisfied with my observations of the obvious. Not that I was able to give him an answer, but it did confirm to him that his next step was to find and hire a technical assessment consulting team to examine his company’s current processes and procedures to advise specifically where the use of smart contracts and blockchain apps makes efficient bottom-line sense. Suggesting he approach and do a tender with several Russian firms I recommended got him all excited. He now had an operational plan of outsourcing action, he could make positive, visible inroads with his quest, and my fee plus that lunch was secured.