Can smart contracts be used in an environment without a blockchain? This is a question raised by users of the US version of Zhira Quora. Among the relevant answers, about half of the answers are yes, and the other half indicate that the two cannot be separated.
So, which one is the answer?
Well, the answer given by S & P Global Platts (hereafter referred to as Platts), the world's leading commodity pricing company, is "yes". This company claims that their smart contract system is at the center The distributed ledger does not use distributed ledgers.
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In order to understand this debate, we must first define the key terms involved. If you already know something about blockchain, please ignore this part.
What exactly is a smart contract?
Many people will equate smart contracts with blockchain, and some people think that cryptocurrency, blockchain, distributed ledger technology (DLT) and smart contracts are the same thing.
In fact, they are not the same.
The concept of the blockchain means that the "information block" is stored in the digital ledger through an encryption algorithm that is difficult to crack. As each piece of new information is added to the ledger, the length of the ledger will gradually increase.
These blocks of information can be accounting records of transactions (and who owns what), in which case the blockchain forms the basis of cryptocurrencies.
If the information is part of the software, it stores the terms of the contract agreement and the conditions for executing the contract, then it is a smart contract.
To enhance security to prevent hacking and fraud, blockchains often use DLT system storage. This means that the exact same blockchain is copied and stored on many different computers in the network (each computer is a "node").
This makes it more difficult to “deceive” this autonomous record-keeping system, because to change anything, at least 51% of the nodes need to agree to allow the transaction to occur, and then add this new information to all copies.
For example, in terms of cryptocurrencies, if I decide to transfer 10 BTC to my friend Alex, at least 51% of the thousands of computers connected to the Bitcoin network on the Internet must agree before the transaction can begin, I have 10 BTC in my digital wallet first.
In the case of smart contracts, purchasers of products can use smart contracts to manage the entire transaction and then say:
"When the independent source confirms the quality of the goods, I will pay a 20% deposit, and after the goods are shipped, I will pay another 20%, and when the goods arrive in my warehouse intact, I will pay the remaining balance Send it out. "
If these rules are coded into a computer program and executed automatically at each stage when the trusted information source is updated, then it can be a smart contract.
So why not use traditional technology?
Well, remember that blockchain has the advantages of encryption and storing copies of its ledger across multiple different nodes? These two protection measures can prevent the information stored on the blockchain from being easily tampered by hackers to reduce the problem of fraud.
Those who believe that “smart contracts cannot be used without a blockchain” actually mean: “To make smart contracts useful, you must have both layers of protection.”
However, Platts doesn't agree with this statement. Why?
Cost vs protection
In the field of commodity trading, Platts is a "price reporting agency" (we may simply call it PRA).
In commodity markets, prices are usually negotiated privately by buyers and sellers. So how do the parties know that they have received a fair price compared to other similar transactions?
This is what PRA platforms like Platts are doing, they collect commodity transaction information from all over the world and publish it as a price index. These indices have become reference points for the pricing of current trading contracts, as well as financial derivatives used by large buyers and sellers to hedge future transactions.
This is a big business!
Data show that in 2018 Platts achieved revenue of $ 815 million and operating profit of $ 383 million.
Traditionally, Platts collects pricing information by having their employees call buyers and sellers and ask them one by one.
In recent times, Platts has digitized some of these workloads by allowing larger players in the market to submit their transactions through online platforms.
However, this poses a problem. How does Platts know that the transactions submitted by participants did occur and that the prices were real? It is entirely possible for sellers to falsely report high prices, while buyers may do the opposite, and by doing so, they can affect the price index and then benefit their future transactions.
A PRA platform like Platts has traditionally been verified by testing actual market prices with third parties and requiring reliable sources to provide supporting documents such as shipping and funding.
On November 4, 2019, Platts announced the launch of Trade Vision, an online platform for gas market participants to submit their own price information.
Although the initial announcement did not detail the technology involved, the company subsequently revealed that Trade Vision was built using smart contracts stored on a centralized ledger (not DLT).
So why didn't Platts consider using DLT? This is because the cost of having two layers of security (encryption and multiple nodes) at the same time is very high, which can require a lot of computing power and time. By retaining encryption and using only one central server to store the digital ledger, Platts sacrifices a security feature but captures practicality and efficiency.
"Blockchain has huge advantages in terms of security and encryption … but its disadvantages in speed, cost and energy intensity mean that for many participants in the commodity market, blockchain is currently very Difficult to expand. And providing smart contracts with similar security levels has become a reality. This uses a centralized ledger that does not need to be recorded at the same time, thereby reducing energy, delays and costs.
—— S & P Global Platts ” Platts president Martin Fraenkel commented: "In just a few weeks, we have almost half of our data submitted through Trade Vision."
Perhaps the experience of Platts tells us that we can use part of the blockchain instead of trying to integrate the entire concept into every potential application.
It's too early to claim this as a model, but at least our initial question seems to be credibly answered: Yes, smart contracts can be used without a blockchain, it sacrifices security attributes, In return are cost and efficiency advantages.