OVERVIEW OF SMART CONTRACT & ADOPTION

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Strictly Confidential www.rma.com.my © 2021 RM Applications Sdn. Bhd.
SEMINAR ON OVERVIEW
OF SMART CONTRACT
& ADOPTION
Lokesh Gupta
CTO / CO-FOUNDER
RMApplications Sdn Bhd
lokesh@rma.com.my
Presentedby:
www.rma.com.my

Introduction
- Definition
- Execution Steps
- Types of Smart
Contract

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What is Smart Contract
The concept of a smart contract originated in 1994 by a computer scientist Nick Szabo stated
the following:
““Traditional Contracts are set of promises agreed to in a "meeting of the
minds”
“
““A smart contract is a set of promises, specified in digital form, including
protocols within which the parties perform on the other promises.
The basic idea of smart contracts is that many kinds of contractual clauses
(such as liens, bonding, delineation of property rights, etc.) can be embedded
in the hardware and software we deal with, in such a way as to make breach
of contract expensive (if desired, sometimes prohibitively so) for the
breacher.”
“
See Nick Szabo, Smart Contracts: Building Blocks for Digital Markets, 1996, http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/ szabo.best.vwh.net/ smart_contracts_2.html

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Simplified Definition
“Smart contracts are self-executing ‘Trustless’ agreements containing the terms and
conditions of an agreement among peers. The terms and conditions are defined using
algorithm and written into code. The smart contract are stored and processed using
blockchain's decentralized platform such as Ethereum. The agreements facilitate the
exchange of money, shares, property, or any asset.”
“Code is the Law”

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The parties
agree on a
contract.
The rules are coded ina
program
The contract
defines a setof
rules.
This program is stored in the
nodes of theBlockchain.
The nodes of the Blockchain will
execute the program
of the SmartContract.
Steps in Execution of Smart Contract

6
Types of Smart Contract
Source : https://www.linkedin.com/pulse/smart-contracts-business-process-enablers-blockchain-antonio-grasso

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Traditional Contract vs Smart Contract
See Nick Szabo, Smart Contracts: Building Blocks for Digital Markets, 1996, http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/ szabo.best.vwh.net/ smart_contracts_2.html
“Traditional Contract : Bound by Law &
Governed by People”
“Smart Contract: Code is the Law by
automating the enforcement of Terms ”
• Still largely paper-based, or email
attachment
• Manual & Time Consuming
• Required Third Party for authenticity
• Expensive
• Manual or Digital Payments (Triggered
Manually)
• Physical Presence / Physical Signature
Required
• Trust in one another / Intermediaries
• Described in Human Language
• Self-executing and digital contracts
• Immutable : No changes can be done
• No Third Party required for authenticity
• Fast & Efficient
• Digital & Auto Payments (Triggered based
on execution of Events)
• Virtually Executed using Digital Signature
• Trust in the smart contract
• Described in Machine Language / Binary
Nature
• Cost Efficient

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Smart Contract Process & Components
Neither smart nor a contract, it is a code element containing conditions
triggering actions to execute
Terms are agreed by
all counterparties
Event triggers
contract execution
The smart contract is
automatically executed
based on the pre agreed
term
Payout and other
settlement is completed
instantly and efficiently
Settlement
Executive Value
Transfer
Events
Pre Defined
contract
Blockchain Event Communications Payments

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Blockchain
Blockchains are shared
across its Users, owned
equally by all
Multi-locational data structures
owned by all Users and
accessible to all providing
flexibility and robustness
Once a transaction is initiated it
cannot be deleted. The integrity of
ledger can be easily proven and is
auditable.
Blockchain forms the foundation of a Smart Contract, a secured & decentralized platform of
intense collaboration without any third party central Authority
Blockchain promotes “Single Version of Truth”
Contracting Parties using Smart Contract can be confident that agreement terms and status are fully secured with Integrity and
any changes or updates are automatically updated to all Members
Shared Decentralized Immutable
Transparent
Every member will have an
access to the whole set of
transactions that occurred
since the date of creation
Secured
Validation of transaction
follows cryptographic
methods and requires to be
validated by all members to
maintain integrity
Disruptive
No cost associated for
“trusted central authority”
recordkeeper intermediary
allows transaction to be
executed beyond boundaries

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Event Trigger : Oracle Connectors
▪ An oracle facilitate communication with external ecosystem where external input is
part of agreement code
▪ Oracles collects required
external information from
trusted and pre-defined
API in a secured manner
for Smart Contracts to
consume
▪ The triggering of event happens upon receiving the information from the oracles
using the API
Figure Source : Kantur, Habil (2018), How smart contracts can change the insurance industry - Benefits and challenges of using Blockchain technology. https://www.researchgate.net/

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▪ Deterministic Smart Contracts : A smart contract that when it is run, it does not depend on
information from an external party (from outside the blockchain). The smart contract itself has all the
sufficient information for execution.
E.G : Peer-to-Peer lottery: the funds are held on the Blockchain network and random numbers are
also generated by the smart contract code. At the end of the lottery, the funds are transferred the
winners account via his or her address on the Blockchain network
▪ Non Deterministic Smart Contracts: A Smart contract that depends on information (called oracles
or data feeds) from an external party for execution. The information is not available on the blockchain
and requires data feeds (oracle). Oracles Connectors are known in computer science for their ability
to provide information from outside a system that the system itself cannotacquire.
E.G : FX Trading: the funds are held on the Blockchain network and only upon reaching the pre-
defined FX rate then only trading will happen. Here the Oracle Connectors will be used to get FX Rate
Feed.
Classification of Smart Contract

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Digital Assets / Currencies
Source : https://www.visualcapitalist.com/cryptocurrency-redefining-future-of-finance/
https://www.gminsights.com/industry-analysis/cryptocurrency-market
A cryptocurrency is based on public-key
cryptography using blockchain technology
and has evolved as a medium of exchange
however:
▪ no intrinsic value in that it is not
redeemable for another commodity,
such as gold.
▪ no physical form
▪ not a legal tender
▪ not backed by any government or legal
entity.
“Despite all the above, it is still being used
for Payments and actively traded”

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Digital Assets / Currencies : CBDC
Cryptocurrency,
CPMI (2015)
Central bank digital
currency, Bjerg
(2017)
Bank
deposits
Cash
Not Backed
by Central
Bank
Peer-to-
Peer
Electronic
Commodity
money
Crypto-
currency
Central
bank-issued
Universally
accessible Electronic
Cash
Central
bank digital
currency
Reserves
Bank
account
money
Source : Adapted from Bjerg, O. (2017). Designing New Money: The Policy Trilemma of Central Bank Digital Currency. Copenhagen Business School, CBS. MPP Working Paper
Wallets
Investment
Funds

Smart Contract Technologies
- Technology
- Typical Design
Overview
- Typical Design
Components

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Smart Contract Technologies
Source : Adapted from Bjerg, O. (2017). Designing New Money: The Policy Trilemma of Central Bank Digital Currency. Copenhagen Business School, CBS. MPP Working Paper
Source : Daniel, F. and Luca Guida. “A Service-Oriented Perspective on Blockchain Smart Contracts.” IEEE Internet Computing 23 (2019): 46-53.

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Typical Smart Contract Application Design
Blockchain
developer
Smart
Contract
submits
develops
develops
recorded
accesses
event
emits
emits
D
Ledger
‘get’, ‘put’,
‘delete’
Client
Application
SDK
!
!
World state
block
txn1 txn2 txn3
Blockchain
Peer
event
Source : Adapted from https://www.ibm.com/topics/smart-contracts
Database for
Application : Storing
all the Transactions
/ application logs etc
Block listing and each block
describes a set of transactions
(e.g. the inputs / executions
related to smart contract
invocation)
….
txn4
Business Case Application
developed using distributed
ledger solutions e.g.
Hyperledger Fabric
Contains the
business logic,
events and rewards

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Typical Smart Contract Application Components
Source : Adapted from Horea, Porutiu (2019), “Deploy a blockchain web-app with Hyperledger Fabric” (Presentation by IBM)
Membership
Smart Contract
Systems Management
Events
Peer Network
Wallet
Ledger List of transactions maintained by Peers
f(abc); Software running on peer, updates the world state
…
E T
Network which reaches consensus to add blocks
Authenticates and manages identities on network
Emits notifications of operations on network
Enables us to create/monitor blockchain components
Securely manages a user’s credentials
i
Systems Integration Integrate blockchain with eternal systems
!

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Use Case Scenario for eVoting
Source : Adapted from Horea, Porutiu (2019), “Deploy a blockchain web-app with Hyperledger Fabric” (Presentation by IBM)
Membership
Systems Management
Events
Peer Network
Wallet
Ledger
f(abc);
…
E T
i
Systems Integration
!
Smart Contract
The ledger containing history of submitted votes
Voter Contract. Registers voters & submits votes
The peers who run the Voter Contract
Public and private key for each registered voter
Emit events to when a transaction is complete
Extension to manage nodes & network
Stores our voter’s public/private keys and certs
An API to validate voter registration (DMV API)

Smart Contract Use Cases
- Insurance
- Supply Chain

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Use Case Scenario Blockchain with Smart Contract
Banking
• Supply chain and
trade finance
• KYC -Know your customer
• Transaction banking,
payments and digital
currencies
Financial Markets
• Post trade
• Unlisted security and
private equity funds
• Reference data
• Cross currency payments
• Mortgages
Retail
• Supply chain
• Loyalty programs
• Information sharing
(supplier – retailer)
Supply Chain
• Workflow digitization
• Supply chain visibility
• Provenance and
traceability
Healthcare
• Mediated health data
exchange
• Clinical trial management
• Outcome based contracts
• Medicine supply chain
Manufacturing
• Supply chain
• Product parts
• Maintenance tracking
Governance
• Asset registry
• Citizen identity
• Fraud and compliance
Insurance
• Complex risk coverage
• Group benefits
• Parametric insurance
• Asset usage history
• Claims filing

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A father underwrites
a life-insurance with
his insurer, by
designating as
beneficiaries his
wife and two
children
1
A Smart Contract is
created in a
blockchain including
the following
information: insure
name, names of the
beneficiaries, amount
of the life-insurance
2
Blockchain
side
Names of the insured and
beneficiaries are checked on a
regular basis with the RNIPP
In parallel, a verification of the
civil status data (weddings,
births, divorce, etc.) is also
carried out
3 Occurrence of a birth
(i.e. potential change
in the beneficiaries)
5 The sales rep / tied
agent contacts the
insure to confirm the
change of the
beneficiaries
7 Occurrence of death of
the insured translates
into provision of
information at “Etat Civil”
level
9
Automatic issuance of
compensation order to
the beneficiaries
10
The Smart Contract
automatically
triggers a
notification to the
sales rep / tied
agent who his
responsible for the
client relationship
6
Useful data is made
available on the Blockchain
by an Oracle on a regular
basis
The Smart Contract checks
that the “conditions”
defined have not been
changed
4
Etat
Civil
RNIPP
The Smart Contract is
updated with the
change of
beneficiaries
8
Update
Insurance
Service
Provider
Insurance Contract Lifecycle MGMT by SCOR
Source :https://www.reinsurancene.ws/scor-chainthat-test-blockchain-proof-concept-reinsurance/

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Claims Management by Change Healthcare
Source :https://usecases.chain76.org/smart-contract-healthcare

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Letter of Credit Use Case
Source : https://www.cbinsights.com/research/blockchain-disrupting-banking/

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Letter of Credit Use Case using Smart Contract
Source : https://www.cbinsights.com/research/blockchain-disrupting-banking/

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Secured Automated Lending Technology (SALT)
Source: https://www.investopedia.com/tech/salt-secured-automated-lending-technology-blockchain/

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Benefits of Smart Contract
STANDARDIZATION
Transactions are encrypted and stored on a
distributed ledger intended to be immutable.
Automating flow of digital assets and
payments may foster new products and
business models.
BUSINESS INNOVATION
CERTAINTY
COMPLIANCE INNOVATION
Standardized code and execution may
reduce costs of negotiations and
agreements
ECONOMY AND SPEED
Automation reduces transaction times and
unnecessary manual processes.
SECURITY
Compliance such KYC / Digital Token
to minimize anonymity
Well-designed smart contracts execute
automatically thereby reducing
counterparty risk and settlement risk.

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Smart Contract Challenges
▪ Anonymous parties could be a concern. For example,
one party may sign an agreement with a minor. This
creates a risk of the enforceability of the agreement
▪ Limited knowledge on the programmable logic and code
(representing the terms and conditions) may not be
easily understood between contracting parties.
▪ No territorial jurisdiction, thus making it difficult to
determine which laws will apply to govern contractual
issues related to a specific smart contract
▪ Difficult to resolve and arbitrate disputes arising from the
performance of the smart contracts
▪ The technology is still new and evolving.
▪ Security is a concern as hackers continue to identify new
attack surfaces that allow them to compromise the intent
of the businesses that specified the rules
Technological
challenges; legal
Challenges; Financial
regulation issues;
User Awareness &
Compliance
Challenges

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Will Smart Contract Replace Traditional Contract
• Not entirely, anyway.
• More applicable when terms and conditions are straightforward, objective, and
quantifiable.
• Contracts represent an agreement between humans, not machines. Limited
knowledge on mathematical, deterministic language used by Smart Contracts,
the Traditional contract is here to stay.
• Nevertheless, Smart Contracts will be future of Contracts... It Could also be
Hybrid Contracts !!

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lokesh@rma.com.my
Thank You

OVERVIEW OF SMART CONTRACT & ADOPTION

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