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Let’s talk about FinTech (pt.2)

Emoke Laszlo

March 13, 2020

If you read my previous posts, you know that I, as a non-IT person, find all the IT-related abbreviations intriguing, so I decided to do my research and share with you what I’ve learned so far.

In this blog post we are going to talk about smart contracts and Ethereum, which I heard of from one of my colleagues when I did my research on blockchain.

The term smart contract was introduced by Nick Szabo at the end of the 90’s, explained as the following: A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives are to satisfy common contractual conditions.

Let’s put aside all the technical terms and get a more real-life example on how smart contracts work with an example. I go to a vending machine to buy a bag of potato chips, I put in the money and press the button, let’s say B5. The lever in the vending machine pushes out the bag of chips, marked with the combination B5. A smart contract works similarly, based on the encoded “if-this-then-that” conditions the contract actually knows what to do (the smart part). So, a smart contract basically defines the subject of the transaction and includes a precise definition of the terms of executing the contract. Like a real-life contract, but in addition the smart one executes itself based on the terms included.

A smart contract, as I said earlier, is self-executing, self-verifying, auto-enforcing, cost-saving and able to remove third parties. They can be used for many things, the simplest one might be transferring money from person A to person B.

For example, person A signs a contract with person B: if B develops a website for A, he will get 400 euros for his work. When signing the contract, A coded his requirements in the conditions (how the website should look like) onto the Ethereum platform. When B submits the website proposal, the Ethereum blockchain will evaluate it based on the requirements A coded in. If the website meets every single criteria, the payment will be instantly sent to B in the form of Ether. This is a safe cooperation, since none of the parties can modify the conditions after it was uploaded to the platform , because it is based on blockchain concept where is impossible to alter already made agreements. So, B can be assured that he will get his money after he developed the website according to A’s criteria. If B submits a website, that did not meet the criteria, he must redo it until it is accepted.

Ethereum is an open software platform based on blockchain technology, that allows people to connect to each other without a central authority. This makes possible for Ethereum to support smart contracts. It has a special coding language, called Solidity.

About the advantages of the Ethereum, I recommend reading Virgil Griffith’s article. Basically he explains how the game theories can be transfered and solved easily on this new platform, which offers a new intriguing perspective for cooperation. In economics the game theories refer to the studies where different economic actors interact based on choices they have to make. These choices can result in different results based on the intention of the actors. The theories illustrate the strategic decision-making behavior of certain players(decision-makers), attempting to describe the tactic that maximizes the chances for each player to individual success mathematically and logically. What Griffith says in a nutshell is, that this new platform and smart contracts force/motivate people to think and act rationally, while the focus shifts from individual success to mutual benefits.

Griffith refers to Ethereum as an “unprecedented arena for playing cooperative games”, he also illustrates how game theories can be adapted to Ethereum.

Take for example, the Prisoner’s Dilemma, which is a non-cooperative game, based on two players, A and B, who commit a crime and end up in prison, faced with the decision to drag each other down: if both of them confess against each other, both end up in prison for 5 years; if A betrays B, but B remains silent, A will earn his freedom, but B will serve 10 years in prison and vice versa; if A and B both stay silent, both of them will serve only 3 years.

When we move this game to the Ethereum, it suddenly becomes a cooperative game: both players, before committing the crime, put in deposit a million dollars into a smart contract, with a statement: if one of them betrays the other, they will automatically lose the million dollars. Because of the smart contract, neither of the players will confess as long as they don’t get a higher value offer from the investigator. Rational players will always choose not to betray the other one, in order to save the money/value deposited initially.

As a new platform, Ethereum represents the idea of new way of thinking as well, and the possibilities of using it are endless.

This is all I’ve got for you today, see you next time when we continue to explore the world behind!