smart contracts: what’s new in Ethereum and what’s next
The idea behind Ethereum smart contracts is relatively simple. Like all good business ideas, it can be explained in just a few lines.
Instead of focusing on a new form of digital cash, like Bitcoin, Ethereum’s raison d’etre is to be used for programming code, backed by smart contracts.
Contractors seeking payment for their services are regularly required to negotiate a complex web of emailed or paper invoices, purchase order numbers, 30, 60 or 90 day delays through labyrinthine payment processing systems of the companies they supply.
Imagine this instead. As soon as delivery of a service is complete — say for argument’s sake it’s a truckload of cabbages arriving from a farm to a grocery store — payment is automatically triggered and approved by code, instead of having to be signed off by a human bookkeeper.
making contracts smarter
Before they start working together, the farmer and the grocery store have a smart contract drawn up.
Smart contracts look very similar to the standard agreement the two parties would normally sign: covering how many cabbages the farm can deliver, how frequently, what standard the vegetables will be, and how much the store will pay for each delivery.
With a smart contract, the terms of payment are automatically triggered when certain conditions are met. In this case, the delivery of cabbages on time and to order.
Instead of the farmer waiting weeks or even months battling bureaucracy to get his payment, it lands in his bank account instantly. Being able to automate away a huge pain point for businesses and their suppliers is one of the reasons why there is so much buzz around Ethereum.
IKEA uses smart contracts
This is not just theory. This is happening right now.
The Icelandic branch of famed furniture giant IKEA made history in October 2019 by settling an invoice with a local retailer using an Ethereum smart contract.
The clothing seller supplied IKEA with a set of stock, and IKEA instantly paid the invoice using a digital version of the local currency, the krona.
All very simple, and very easy. This method is not available everywhere just yet, because not every country has a digital version of its fiat (state-backed) currency. The Icelandic market regulator, the Financial Supervisory Authority of Iceland, handed bridging company Monerium what is understood to be the world’s first licence to issue e-money on blockchains in June 2019.
Programmable money that is regulated by host nations — sometimes referred to a Central Bank Digital Currency (CBDC) — will become the foundation of blockchain-based business smart contracts. Again, this may found far fetched, but China is making swift progress with its own CBDC, testing the tech in Shenzen and Shanghai right now, with expectations to launch it cross-country in late 2020 or early 2021.
the Ethereum Istanbul upgrade
Blockchain fintech analysts Alphapoint suggested in a 2019 research document that Ethereum’s Istanbul would mark a turning point for the blockchain.
Chief among the main concerns about Istanbul were that the hard fork — essentially a backwards-incompatible network upgrade — would break smart contracts that had been written and deployed on the previous chain.
The above concerns proved prescient when Swiss company Aragon, a governance platform for decentralised applications (dapps) that are controlled using smart contracts, warned that the Istanbul hard fork would break 680 smart contracts already in use. Aragon’s chief technical officer Jorge Izquierdo told Coindesk that developers “don’t want to build [dapps] on a moving target” and that the kind of backwards compatibility available in non-blockchain software should be taken more seriously.
Ethereum’s programmers had been debating for months what should and should not be included, but finally pushed Istanbul through in December 2019.
Six main upgrades, called EIPs or Ethereum Improvement Proposals, made the cut. There’s more information on the precise changes in this Consensys blog post. Three of the EIPs dealt with gas costs.
The cost of completing a transaction on Ethereum is called ‘gas’, and is paid in fractions of the ETH currency called gwei.
Writing for CryptoNews, Weiss Ratings analyst Juan Villaverde outlines the issues Ethereum faces.
“The Ethereum network is so popular that it’s routinely overloaded,” he writes.
“Transaction times become agonizingly slow. Transaction fees become exorbitantly expensive. And it’s mostly been this way since 2017 — a chronic ailment that challenges the best minds.”
As Villaverde notes, newer blockchains like Tezos (TXZ) and Cardano (ADA) both promise to be improved versions of Ethereum, offering users a way build and deploy smart contracts while skirting the acute problem of congestion on the Ethereum network.
While Istanbul is Ethereum’s eighth major network upgrade since its inception, all of this work to improve the platform is really pointing towards towards Ethereum 2.0. This is when the blockchain will transition from its current Proof Of Work consensus algorithm to Proof of Stake, transforming the way Ethereum’s blockchain is secured and forever changing the economics of this particular blockchain. We do not yet have a firm deployment date for Ethereum 2.0, but industry analysts suggest it will debut in the next 12 months.
According to Ethereum co-founder and figurehead Vitalik Buterin, when version 2.0 comes into being, transaction times will fall from the current state of several minutes to just three seconds. This kind of functionality would put smart contract execution speed into the same realm as swiping a credit card, or sending an email.
The idea of smart contracts is rapidly gaining in popularity and is becoming part of the legal fabric of some of the world’s largest economies.
Legal experts in the UK, for example, made a landmark decision in November 2019 that smart contracts met the definition of contracts under English law, and were thus enforceable by its court system. “Statutory requirements for a signature can be met by techniques such as private key encryption,” the decision noted.
One thing is certain: the platform that allows for the easiest and most friction-free way for businesses to use smart contract technology — whether that is Ethereum 2.0 or one of its main rivals — will win a firm place in business history.