Bitcoin technology allows us to do a great many things in all aspects of life. Not only can we use Bitcoin as a payment method for various goods and services – both online and offline – but the underlying technology has tremendous potential. And one of the most interesting adaptations of that technology comes in the form of smart contracts.
Smart Contracts – The Optional Human Element
The beautiful thing about smart contracts is that they work in the same manner as any regular contract, drawn up between multiple parties. A certain set of expectations has to be met to validate the contract and create a favourable result. In most cases, that result will be the change of money from one party to (an)other(s).
As a quick example: imagine someone who works as a freelancer. A company stumbles upon his or her resumé, and wants to hire that person to develop a new software backend. In the contract, there is a clause saying that payment will only occur if all expectations of this development project have been met. The freelancer has 20 days to complete the task.
This means that, if the work is not completed, or not satisfactory, or not without the set time limit, the freelancer will not get paid. In the real world today, such contracts are rather difficult to enforce, and will more often than not end up in a court case where a jury has to decide who is in the right and who is in the wrong. A tedious process costing a lot of time, effort and money.
Smart contracts would use this existing “infrastructure” and make some much-needed improvements to it. Contracts are still agreed upon by multiple parties and the associated funds held in escrow for the duration of the contract. In doing so, all parties can verify the person hiring someone for a job has the funds they claim to possess, and if the job is completed successfully, the funds will be sent to the rightful person.
The outcome of said smart contract will be determined by a computer or an Oracle. As the rules are set in stone when the contract is signed by all parties, there is no specific need for a human to oversee the outcome. In the case of a dispute, however, someone has to intervene. And those will be the Oracles, real people interjecting themselves into the Bitcoin ecosystem.
Oracles – The Human part of Smart Contracts
As good as all of the above sounds, there is one major problem when it comes to autonomous smart contracts: there is no possibility of adding a clause that relies on external inputs. For example, creating a smart contract for sports betting is next to impossible, as the outcome depends on an external factor (what is the result at that time?).
However, there is a solution for this, which requires the intervention of the aforementioned Oracle. Granted, an Oracle is a third party, which partly nullifies the autonomous aspect of smart contracts. However, using an Oracle opens the door for including external inputs into smart contracts, which is a necessary step in the evolution of this technology.
A Coinffeine representative told us that:
“This mechanism allows that the payment of a transaction is executed only if an external condition is met. So Oracles can, therefore, validate clauses that refer to external information. They are the third digital party that verifies and executes certain terms of the contract. We could say it’s like a notary who has the capacity to judge and see if certain conditions are met in the external world, but they cannot touch the money.”
Using an Oracle in the world of smart contracts opens up other possibilities as well. Bitcoin is a non-reversible payment method – unlike credit cards and most other online payment services – but that status could change in the future. Because the associated money is conducted under the terms of a smart contract, Bitcoin refunds are technically a possible scenario. It remains to be seen whether or not this will ever occur in a real-life scenario though.
It is important to keep in mind that, while Oracles can decide the outcome of a smart contract, they will never have access to the funds being held in escrow
Source: Coinffeine Blog
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