We learned in the last post that the Blockchain is a global secure ledger hosted by countless computers who record, verify, and secure transactions. They not only record the involved parties and amounts in these transactions like the Bitcoin Blockchain, but can also support smart contracts on a Blockchain such as Ethereum.

“Trustless” Transactions

A Blockchain allows for a trustless transaction. What does this mean exactly? Well, simply put, nobody has to trust anybody else in order for the system to function. Before bitcoin, every form of digital currency needed a central authority that you had to trust in order to use the currency, and that central authority became a weakness in the system.

Here is how a smart contract on a Blockchain can change an every-day transaction:

The issue at hand....

Say you buy a car from a private party. You have to gather the cash to pay a stranger for the car, all the while terrified that they will not follow through with their end of the deal. You decide to buy the car and risk not getting the car checked out beforehand because you really want the car before someone else buys it. You take the seller’s word that the title is clear of accidents and bank liens.

Then you bring the car to the state and your insurer to be registered and insured. This may require a day out of work. Think about all the paper, risk, and uneasy feeling in this process… on both the buyer and seller sides of the sale.

There are numerous parties involved and numerous variables of an outcome that are managed by competing interests.

There are a lot of situations that are "your word against mine" that a court would not be able to enforce.

How can this issue be solved?

In the future, this transaction could be a ledger line inside of a block as explained in the previous blog. A smart contract can be written within this ledger line that would serve as a mediator.

What exactly is a smart contract?

This is often called a “crypto contract” and is a computer program that directly controls the transfer of digital currencies or assets between parties.

How the Blockchain could simplify this process:

The code would be written in any coding language (Google Go, Linux, etc): if the car passes inspection and has a clean title and the customer has a credit rating worthy of a loan, then the title of the car will be transferred to the purchaser and a lien on the title will be placed for the crediting bank and the crediting bank will pay the seller and the car will be insured by the insurer and will be registered by the state and the purchaser will commence monthly debt payments back to the bank at so-and-so terms.

In simplicity, an algorithm written by the buyer and seller (using a coding template that they bought for the price of a piece of paper [potential for a whole new legal / IT industry]) will enforce the sale only if certain variables or milestones are met.

Think about a vending machine....

As another aid to help understand, a smart contract is like a vending machine: An unmanned intermediary device that allows for the fulfilment of a transaction only if certain variables are met such as soda can only be withdrawn if a certain amount of money is put in. If too much is put in, then change is to be dispensed. Money is put in and a request for soda is made.

The contract will not allow the transaction to be completed until what is written in the code is satisfied. The Blockchain in the car sale example eliminates the need for at least two banks which would be replaced by currency wallets in the possession of the buyer and seller. It also protects the car title and protects each party from being taken advantage of.

All those would-be papers are instead encrypted computer code, shielded from the public unless a key is provided, meaning, a key providing access to all or some of the details of the transaction can be shown to the state, insurance company, mechanic, or the parties of the transaction for safe keeping of records. If you think about it, this process would make consumer credit and title research agencies no-longer-needed (past records of debt payments and titles would be provided to the lending bank via special key).

In part III, we will provide an example how the lack of a Blockchain smart contract causes problems down the road from the transaction for the buyer of the car and we will also look into how the car’s parts can be traced through the car’s supply chain through the Blockchain.