Khóa luận tốt nghiệp: Legal regulations of smart contract in the United States and lessons for Vietnam

Overview situation Having spent a lot of time researching for this topic, I came to the conclusion thatthe majority of theses, research papers, and publications on the subject all focus

MINISTRY OF JUSTICE MINISTRY OF EDUCATION AND TRAINING

TRINH TRI DUC

453036

LEGAL REGULATIONS OF SMART CONTRACT IN

THE UNITED STATES AND LESSONS FOR VIETNAM

GRADUATION THESIS

Hanoi - 2024

MINISTRY OF JUSTICE MINISTRY OF EDUCATION AND TRAINING

TRINH TRI DUC

Hanoi - 2024

DECLARATION OF AUTHORSHIP

Thereby declare that this is my own research work, and thatall conclusions and data presented in the graduation thesisare truthful, enstring reliability./

Signature of thesis instructor Signature of author

CHAPTER 1: FUNDAMENTALS OF SMART CONTRACT

1.1 Definition, general information and practical use of Blochc hain technology

111 Definition of Blockcham tecÌ:noÌogy te 127 11.2 General information of Blockchain technoÌøgy cọoocccccccecceeoeeeo.o 1G

113 Working process of Blockchain technolagy ìằ co 1 11.4 Constiment of a “block” in a Blockchain system cccceoo 18

1.1.5 Some common algorithms in Blockchain technÌegy - .: -2222 .-8

116 Disnnet characteristics of Blockchain technology

117 Practical use of Blockchain technology

1.2 Definition, general knowledge, and practical use of Smart contract

1.2.1 DWtttiờn Of Smart contrat scsisssssstsssssessesssssnssssssassssssussssansssssicssssstvessecsessivessectaneisesuesseie2O 12.2 General information of Smart contraet 5 22252121 e 28

12.4 Practical use of Smart contract

Conclusion of Chap ter

CHAPTER 2: LAW ON SMART CONTRACT IN THE UNITED STATES.

1.1 Practical use of smart contract in the United States

đ:1 1 Steer tar rte r peer, isssssssnssscuissussaesccansssvssnususacassapasaasssssavasssuasvscsssanssosstuansenespuesanasesvacaer đŨ 11.2 Smart contract in supply chain

1.2 Legal reguhtions of smart contract in the United States

12.1 Legal problems in terms of smart contract in the United Štates àà so 46

12.2 Legal regulations governing smart contract in several states

Conclusion of Chapter 2

CHAPTER 3: LAW ON SMART CONTRACT IN VIETNAM AND LESSONS TAKEN 58

LL Practical use of smart contract in Vietnam.

1.2 The legal aspects of smart contract under Vietnamese bw

12.1 Formation of smart contract

12.2 Legality of smart contraet

12.3 Conditions for asmart contract to be valid.

12.4 The legal consequences when asmart contract is invalidate:

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LIST OF REFERENCES

1 The necessity of the topic

The 21% century has been defined by application of and advancement in

information technology, especially since the birth of the Internet This factor alone hasshifted the world completely, which revolutionalized how the modern world works TheInternet, together with computers, have connected all individuals around the globe by

just a simple click of a mouse button Economic development has been influenced by

technological advancement as well With the advent of the Fourth Industrial Revolution,itis now common to witness transactions of millions of dollars being completed swiftlyand effortlessly between two distinct continents without the need of an in-personencounter This could not have been done without the appearance of several particulartechnology inventions which have been in the field of interest by everyone around theworld They are Artificial Intelligence (or “AI”), Internet of Things (or the “IoT”),Virtual Reality (or “VR’), and Blockchain AI has made it possible for machines tolearn and operate on their own, which has led to a number of amazing breakthroughs invarious fields, loT makes it possible to collect and share data on an unprecedented scale

by connecting physical objects and devices to the fullest extent; VR allows users to

immerse themselves in a computer-generated environment! While the aforementioned

technological innovations are certainly beneficial for the advancement of humanity

worldwide, citizens, businesses, and governments - especially those in the United

States—are showing a great deal of interest in blockchain and smart contracts.

Blockchain technology is superior in the way that it is anew way of storing data

in which transparency, security and cost- efficiency are its major priorities The UnitedStates has integrated blockchain and smart contract in many aspects: from supply chainmanagement, real estate transactions, crytocurrency to healthcare, intellectual propertytights or decentralized finance The Unites States has always been considered one of theleading countries in the process of perfecting its legal system, now on the way to enactinglaws and utilizing existing legal resources to govern the use of smart contract, whichis

“hitps:/Avvnw thirdstage -c onsuking ¢ om/howy-techmology-has-chunged-anwrica/ accessed on March 30,2024

constantly rising The birth of smart contract will certainly give rise to new legal issues.

The startup scene in Vietnam is said to have recently flourished quite vigorously with theappearance of some technology startups, such as Trip.me), Bigboml, LINA Network’,Therefore, it is imperative for Vietnam to develop new legal tools in orderto govern theuse of smart contract, hence swiftly addressing new challenges that arise in the presentglobalization setting In this instance, the United States plays a vital role as one of theleading nations in the world with regards to the comprehensive application of smartcontracts and has the necessary legal tools to regulate this matter, in which Vietnam couldtake lessons from and integrate them into its own legal system, by its own way

Given the aforementioned information, Ï strongly believe it is necessary toconduct more practical research on these matters as they warrant more in-depthinvestigation Therefore, I hereby decided to choose the topic of my graduation thesis asfollows: “Legal regulation of smart contract in the United States and lessons for

Team”

2 Overview situation

Having spent a lot of time researching for this topic, I came to the conclusion thatthe majority of theses, research papers, and publications on the subject all focus on thetechnical aspects of blockchain technology and smart contracts, nevertheless, there is adearth of studies that specifically address the legal issues relating to smart contract andwhich law system, which legal regulations to govern the use of it The reason behind this

is straightforward: when smart contracts were initially introduced to the public, theywere still a difficult-to-use and technically a new and complex technology to understandand apply for normal users, therefore in order to quickly spread knowledge to the generalpublic, a great deal of intricate technical study and publications were required

Besides the legal regulations, there are also a number of articles that are quiteintuitive in evaluating the practicality of smart contracts and expressing personal

*https:/Avwrw trip me/ accessed on March 30,2024

*‘hitps:/ihelb bigbom convgioi-thieu-ve-bigbom accessed an March 30,2024

“https ://commurkete ap com/cumrencss/ima-netvrork/ accessed on March 30,2024

opinions on the legal perspective of this type of contract Havard Law School published

an article named “An Introduction to Smart Contracts and Their Potential and InherentLimitations** in which it outline the background and functions of smart contracts,discuss whether they can be deemed enforceable legal agreements under contract law inthe United States, and highlight certain legal and practical considerations that will need

to be resolved before they can be broadly used in commercial contexts

On a gloabal scale, there are many articles which conducted thorough research inboth technical and legal aspects of blockchain and smart contract Christopher D Clackfrom University College London has an article from 2016 named “Smart contractTemplates: legal semantics and code validation” Š in which he analysed legalregulations, semantical aspect which specifically describe this type of contract, security,wording styles, sample contract, etc Cambridge University has also published researcharticles and books on smart contracts, pointing out the benefits and risks of applying

smart contracts inro real life situations: “The Cambridge Handbook of Smart C ontracts,

Blockchain technology and Digital Platforms” (October, 2019)’ There are also severaloutstanding research projects, such as: “Smart Contract Leads The Way to BlockchainImplementation” by cooperation of Thomson Reuters, a Canadian multinationalinformation conglomerate and Greenberg Traurig which approched this topic under theperspective of the legal system of the United States with smart contract; “Fundamentals

of Smart Contract Security” by the Momentum Press of New Y ork in which it taught theway to understand some basic principles of smart contract and practices In addition, theEuropean Bank for Reconstruction and Development also pubilished a paper: “Stnart

contracts: Legal Framework and Proposed Guidelines for Lawmakers’®, in which it

analyzed the concept, formation and working process of a smart contract, hench dealing

* htps;ffcœpgov law harvard ech 2018/05/26 /an-mtroduction-to-smuart-contracts-and-them-potential

and-‘Bherent-lmatations/ accessed on March 30,2024

* http /Axtwv0 cs mclac ukistaff/C_Cladcresearch/JDB-2-4 pdf accessed an March 30, 2024

7 Wtos/mnr cambridge org/care hooks ambridge

-lundbock-of-smurt-contracts-blockchain-technology-and-digtal platforms /BCDDFAAD7B661E6 026804 1ACA76B3A58 accessed on March 30, 2024

"]umps:/Mawlibrary bứo/ze/bookz/181104 The Suwst Contracts Paper pdf accessed on March 30, 2024

with the questions of what requirem ents it would take to form a valid smart contract andwhat is its governing lew and jurisdiction.

There are some articles worth mentioning written by Vietnamese scholars andresearchers In the Science Conference Proceedings 2021 of Foreign Trade University inHanoi, author Tran Thu Y en has written an article named “Stinart Contract and SeveralCtarent Legal Issues in Vietnam”, in which she analyzed the technology foundation ofsmart contract, thereby giving an overview on the legal aspects of smart contracts inVietnam with recomm endations to improve the legal system, based on several countries.This article mainly focused on the technical aspects and legal regulations of smartcontract from countries such as the United States, the United Kingdom or Singapore butonly provided a few recommendations for reference to improve the legal framework ofVietnamese law regarding this particular legal issue Another article that examined this

matter but was inspired by the viewpoint of Chinese legislators is “Legal Framwork for

Smart Contract — Some Suggestions For Vieam From Chinese Law’®, which was

written by Nguyen Thi Minh Phuong and Nguyen Phan V an Anh and published in theJournal of Law and Practice No 55/2023 of Law University, Hue University This articlealso offered similar views as the above article: starting from an overview to China's legalregulations when regulating smart contracts and also suggested lessons that Vietnamcould learn from Upon my research on the topic, I encountered an article which hasaddressed some of the interesting points regarding the difficulties in which Vietnam’slegal system has to solve in order to successfully integrate the use of smart contract intodaily transactions between people, institutions and the State That article 1s “Negotiatingwith code: Smart contracts and open legal issues” and was written by author Vu Thi

Dieu Thao, published on the Civil Law Information Forum." Regardless of its humble

word counts, this article has answered a number of foundational questions related to

common issues surrounding the application of smart contracts such as Contractconclusion, Contract modification, Dispute resolution and User protection.

*‡tps/Rapchủ unl eu vaviindex php AV/article Aview/269 accessed on March 30,2024

!9 https fphaphutdansu.echa vn/20 18/04 06/22/59 ktma-phn-voiem lenh-hop-dang-timg minh-v-van-de-php-Lar

bo-ngo/ accessed on March 30,2024

In conclusion, these above articles and research papers which varied in depth andextent have contributed to the formation of the legal pieces concerning smart contracts.Based on the above premises, it is evident that the United States is at the forefront of theuse of smart contracts in real-world scenarios and now boasts a more comprehensivelegal framework than other nations when it comes to legal regulation and researchintensity Therefore, it is resonable to assume that there are some lessons in whichVietnam can take from the way the United States builds its legal regulations to regulatethe use of smart contract This thesis will summarize and examine in further depth everyfundamental and significant legal concern pertaining to smart contract Additionally,based on both practical applications in the United States and Vietnam, this thesis willhighlight the shortcomings and restrictions in the Vietnamese legal system and offersome suggestions and insights in which Vietnam can learn from the United States, apioneer in the fields of blockchain technology and smart contracts.

3 Target and mission

The goal of this thesis is to examine the United States’ legal framework for smartcontracts and identify any shortcomings in the national legal system by gathering andexamining existing legal regulations and precedents, therefore proposing solutions andpaths to contribute to the process of building and perfecting the legal framwork on smartcontract in Vietnam

This thesis has the following tasks:

@ Determine what is a Smart contract, its characteristics and its practical use;

(ii) Learn about the legal issues of Smart contracts based on the governing law of the

United States and its research development,(ii) Proposals and notes for developing and perfecting Vietnamese law on this

particular type of contract

4 Subject and scope of research

The primary objective of this thesis is to investigate the laws, legal rules, andpolicies that either currently govern or may in the future regulate smart contracts and

blockchain technology in the United States Furthermore, this thesis will alsoinvestigates the practical uses of smart contracts in Vietnam as well as the legal issuesthat arise when employing this kind of contract between enterprises due to the fact thatwhen forming a contract, it is crucial to determine the factors in which a legitimatecontract can be formed between the two parties, such as payment methodconfidentiality, content of commodities, dispute resolution, etc.

Scope of research: This thesis will focus on the law of Vietnam and law of theUnited States and its states when analyzing the legal issues of smart contract, hencegiving suggestions and opinions on the selected topic

§ Research methods

The topic is researched based on the legal system, viewpoints, guidelines andpolicies of the Party and State of Vietnam on encouraging technological developmentand proactively participating in the fourth industrial revolution.

Besides, in order to develop the thesis in a detail and comprehensive way,

methods such as listing collecting, synthesizing, summarizing, analyzing, evaluating,

comparing and contrasting methods are used to implement the stated objectives of thethesis These methods will be applied flexibly and appropriately

CHAPTER 1: FUNDAMENTALS OF SMART CONTRACT1.1 Definition, general information and practical use of Blockchain technology

1.1.1 Definition of Blockchain technologyThe world is constantly changing at a growing pace, in terms of technology andhow information can be transferred and stored How information is processed with easeand confidentiality will be one of the top concerns as the amount of information acrossall fronts is exponentially rising as well as the need for security of information Imaginefrom the old times when people still led a nomadic life, there was no concept ofownership They harvested food and hunt for animals as a way to survive only forthemselves As they growed more stocks and made more crops, they realized they neededmore land to secure their food and more apparatus to maintain the performance ofharvesting They kept farming and producing fruits and vegetables until it reached thepoint where they produced more food than they actually needed, which led to the idea of

exchanging the food they own for something they did not have, for example, trading

their tomatoes for others’ spinach The amount of trading rose to a point where they felt

the need to record, as a way to mark their ownership towards an item they possessed

This is the birth of the first ledger concept

As time goes, human kept trading and recorded their transactions, they soonrealized there was an issue of trust There was no way to verify the authenticity of theinformation contained in a ledger since not everybody has access to one of them Thisis

a major problem because a ledger is only useful when people are confident that theinformation stored in a ledger is truthful and there is no unauthorized changes beingmade to its contents, especially when it comes to the banking industry where peopleentrust the banks to keep their money safe There was a need for an innovative way totransact without the constant fear of human errors and interventions Thus, Blockchain

was born

A blockchain is a distributed database or ledger shared among a computer

network'snodes!! Like the name suggests, a blockchainis a chain of blocks that contains

information It is a distributed ledger that is open to everyone In order to understandhow blockchain is such an innovative technology, it is a requirement to know thedifferences between a centralized ledger and a distributed ledger With centralizedledger, every information of the transaction will be recorded and stored into a specificdatabase, which is curated by a third party These data will normally be stored in a largeserver with a centralized network and the remaining servers will have to depend on thishost server Problem occurs when the host server is attacked by a cyber raid, which couldpotentially lead to the damage of the whole database and the depending servers Thisis

why scientists had to devise a method to transfer and store data so that a harmful attack do not damage data of the entire system whilst ensuring reliability of containedinformation, hence the birth of blockchain.

cyber-Blockchain technology demonstrated a superior mechanism since it operates

based on a completely opposite principle The computers joining this blockchain

network operate under a peer-to-peer network model (or so called distributed network)

with equal power and functions Thus, there will be no appearance of a third party as ahost server; the ledgers will be distributed, hence sharing data to all computers in thenetwork

The concept behind “Blockchain” technology was first outlined in 1991 by

research scientists Stuart Haber and W Scott Stornetta2 They proposed a

computationally practical method that added time stamps to digital documents so thatthey could be backdated or altered The system is dedicated to use an encrypted chain ofblocks to store the time-stamped documents In 2004, Harold Finney" launched a systemcalled RPoW or Reusable Proof of Work The system worked by collecting non-

“ Nodes are generally computer systems that contain a copy of « blockchain's primary protocol and its entire

transaction history.

3? tuart Haber and W.Scott Stometta are the co-awentors of the early blockcham concept They co-2wented the

'blockcham technique for ensuring the integrity of digitalrecords ,viriting + pioneering series of papers and

patents which laid the foundation for Bicom and other digital cuzrencies.

© Harold Finney was an American computer scientist and crytographer Infact, he was one of the very first

Bicom contributor and was given 10 Bitcoms from Satoshi Nakamoto

exchangeable Hashcash based Proof of work tokens and then generating an RSA Minreality, when one person tries to spend tangible money, it will be hard for he/she to spendthe same cain or note twice because the transaction is happening in the presence of one

or more people Thus comes the concept of “Double spending” in which the same unit

of crytocurrency is spent more than once.!§ RPoW solved this problem by keeping

records of the ownership of tokens and registering them on a server which allowed users

to validate their authenticity immediately.!¢

In 2008, in a thesis named “Bitcoin: A peer-to-peer Electronic Cash System” bysomeone, or a group of people, using the pseudonym Satoshi Nakamoto whichintroduced a decentralized, peer-to-peer, electronic cash system based on the HashcashPoW algorithm called Bitcoin In this thesis, Blockchain was defined as databases ofinformation that are created by a network with no central authority’, which means,instead of a public recordation system that exists on paper files stored in a city hall, a

blockchain system would keep a decentralized ledger on the computers of every node

running the software!”

Although having appeared back in 2008, it took 10 years for organizations andunions around the world, such as OECD and EU, to introduce an official definition ofblockchain According to OECD, Blockchain refers to all types of blockchaintechnologies and distributed ledger technologies, including the protocol, network, and

application layers." On the other hand EU stated that Blochchain is ‘a public ledger

consisting of all transactions taken place across a peer-to-peer network It is a datastructure consisting of linked blocks of data with each block pointing/eferring to theprevious one forming a chain in linear and chronological order, which enables theparticipants of apeer-to-peer network to make transactions without the need of a trusted

+ Hashcash is a proof-of-work model and RSA is a technique used to encrypt a public-key used for secure date

‘transmission especially over the intemet which was created by 3 scientists: Ronald Rivest, Adi Shama, Leorard Adleman at Massachusettes Institute of Technology (MIT) m 1977.

* hams /Avwryy 2wvestopedia com/terms /didoublke pending asp accessed on March 30,2024

‘* Jefferey Smith (2022), Blockchean Development- Blockchan Applications , Jefferey Smith, pp 11-12.

* https /ibtcom orgbitcom pdf accessed on March 30,2024

!* lựtps-/wyvri oecd org /dafiblockchanvoecd-reconmendation-on-blockcham-and-other-dit hm accessed on

March 30, 2024

central authority and at the same time relying on cryptography to ensure the integrity of

transactions '1° Although there are many different approaches, Blockchain can be simply

understood as a way to store data in a distributed form linked in chains and networks andmaintained under control over a distributed network

In conclusion, blockchain technology is a decentralized and distributed digitalledger that records transactions across multiple computers in a way that is secure,transparent, and resistant to modification, in which it operates on a peer-to-peer networkand utilizes cryptographic techniques to ensure the integrity and immutability of data

1.1.2 General information of Blockchain technology

As stated above, to understand the characteristics which differentiate Blockchain

as a database model from other traditional models, it is necessary to learn the key factors

of acentralized ledger and how does it differ from a distributed ledger.

a Centralized ledgerThis ledger has a single source of control, finality and writing access, which is

maintained by a single organization either for its transactions or for another external

organization where it serves as a third party trusted source for the transacting parties 3)

Simply speaking in a centralized system, one entity controls the entire system, all theconstituting parts of the system, such as servers, ledgers, and so on, are co-located andexist at the same location The banking system can be a representative example of thistype of ledger, in which lies a major drawback of this type of ledger Imagine the scenariowhen a customer opens an account in a bank and put his/her money in the banking systemwith a level of trust in that banking institute Now the bank will invest a lot of time,money and effort into building and maintaining a system and spend more time, moneyand effort into intergrating and checking with other banking institutes to ensure their

mastered system is in consensus with the other banking institutes system to reach acommon truth In this case, if the systems of one bank institutes fail, this could potentially

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March 30, 2024

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on March 30,2024

lead to the situation where reconciliation is not possible This scenario is obviouslyundesirable, which led to the idea of how to equally distribute information into differentnetworks which play the same role and not dependant on one single network.

b Distributed ledger

In a distributed ledger, there is no central authority or a central administrator It

is an asset database that is shared over the network, where each party on the network hasanidentical copy of the ledger These assets can be financial, legal, and electronic assets.Changes to the value of these assets are reflected throughout the network, and each copy

of the ledger is appended This technology uses cryptography to store informationaccurately and securely Once the data has been stored, it cannot be changed and it canonly be accessed through the use of a key or a cryptographic signature Changing data inone location of the ledger will require that all other locations of the ledger get adjusted

as well which makes malicious intent an arduous task to achieve IT speaking This type

of ledger is not maintained by a central authority thereby shifting the responsibility of

managing data from an intermediary or centralized authority to nodes or computingdevices from any geography

The fundamental feature of a decentralized ledger is the removal of therequirement for mutual confidence between transaction participants Consequently, thislowers the expenses linked to relying on banks, lawyers, government rules, complianceofficials, and other entities that foster confidence between parties involved in atransaction These characteristics of distributed ledger technology demonstrate thepotential to address the shortcomings of centralized ledgers, focusing primarily on theindependence in holding information across interconnected networks In the exampleabove, a customer who wants to open a bank account can be ensured that theirinformation will be securely stored in a system operated on this distributed ledgerplatform Their personal data will always be stored across any participating bank in thisnetwork without the risk of data loss (potentially money or assets) if one bank in the

network goes bankrupt Additionally, security is tightly ensured because no single

individual can alter the content of any stored information unless agreed upon by allmembers of those networks.

1.1.3 Working process of Blockchain technology

A blockchain is a chain of blocks that contain information It stores information

on a distributed ledger, where data is virtually impossible to change once it has beenrecorded inside the ledger Each block has three components, the data, the hash and theprevious block's hash The data depends on what kind of block it is The hash works thesame way a fingerprint does in that it can not be duplicated and you can use it to identify

a single block and all of its content Hashes work by identifying all changes that havehappened within a block; that is why if a piece of data changes, the hash will alsochanges If we have three blocks in the chain, block three will contain block two’s hashand block two will contain block one’s hash, which makes a blockchain so secure

The transactions follow a specific process which based on different blockchain

system For example on Bitcoin’s blockchain, if a person initiate a transaction using

his/her cryptocurrency wallet, the sequence will begin with sending the signal into amemory pool, where it is stored and queued until a miner or validator picks it up It isthen closed and encrypted using an encryption algorithm, hence the commence of themining All the network works at the same time to solve the hash with each one generates

a random hash, except for the “nonce”?! This process will continue until a miner

generates a valid hash, winning the race and receiving the reward”.

There are seven key steps that show how a blockchain works:

1 A transaction occurs between two or more users

2 The transaction is broadcast to the network

3 The transaction is validated and added to the transaction pools

4 A proposed block is created by adding transactions to it by miners

5 Miners race to solve the proof of work to win the right to insert their block into

the blockchain, or a consensus mechanism runs to agree on the transactions Usually,

+! A special mmmber that is assigned to a block ina blockcham during the mining process

* bets:/Annw 2westopedia comhemns/oblockcham.asp accessed on March 30,2024

miners run a proof of work type of consensus mechanism to win the right to add a block.

In consortium or private chains, usually a variant of traditional Byzantine or crash fault—tolerant algorithm runs, which by voting achieves the agreement on a block which is theninserted into the blockchain

6 If a miner wins the right, it inserts the block in its local chain and broadcaststhat block to the network

7 Other nodes accept it if valid, and the process starts again 3

1.1.4 Coustituent of a “block” in a Blockchain systemAfter the information of a transaction is deemed valid, it will be encrypted andstored in a block The structure of this block includes:

(i) Header: It is used to identify the particular block in the entire blockchain Ithandles all blocks in the blockchain, whichis hashed periodically by miners by changingthe nonce value as part of normal mining activity

(10 Hash: It is a reference to the hash of the previous (parent) block in the chain.

(iit) Timestamp: It is a system verify the data into the block and assigns a time ordate of creation for digital documents, which is a string of characters that uniquelyidentifies the document or event and indicates when it was created

(iv) Nonce: It is a number which is used once only and is the central part of theproof of work in the block

(¥) Markel Root: It is a type of data structure frame of different blocks of data Itstores all the transactions in a block by producing a digital fingerprint of the entiretransaction It allows the users to verify whether a transaction can be included in a block

or not.

The first block in the chain is called the Genesis Block Subsequent blocks will

be linked to the previous block by the hash of the previous block and their own new hash

If a block in this chain is altered, its hash will also change accordingly However, theblock immediately following it will still retain the old hash of the modified block,

» hưan Bashir (2022), “Blockcham consensus — An mtroduction to classical, blockchain, and qunnm

consensus protocols”, Apress pp 179.

rendering them incompatible to maintain the chain For a change to be considered valid,the prerequisite is to rehash all subsequent blocks until the last block in the chain,furthermore, each change requires verification and consensus from the majority ofparticipants This will make the Blockchain resistant to data tampering.

1.1.5 Some common algorithms in Blockchain technology

a Proof of Work (PoW)Thisis a consensus algorithm usedin blockchain networks to confirm and validatetransactions and produce new blocks In a PoW system, miners compete to solvecomplex mathematical puzzles, which require significant computational power The firstminer to solve the puzzle and find the correct hash, known as the "nonce," is rewardedwith the right to add a new block to the blockchain This process is resource-intensiveand time-consuming but ensures security and decentralization in the network Thecomputational task will become increasingly complex as the amount of input data

requiring encryption grows, leading to the PoW algorithm requiring a substantial amount

of computer resources to meet this enormous processing demand

bv Proof of Stake (PoS)

In this algorithm, validators are chosen to create new blocks based on the amount

of cryptocurrency they hold and are willing to "stake" as collateral They are responsiblefor the task of verifying the validity of the new block For example, if anode owns 5%

of the existing Ethereum network traffic, then that node has the right to mine all 5% ofthose Ethereum transactions

c Asymmetric Cryptography (RSA2®,

This is a process that uses a pair of related keys: one public key and one privatekey, to encrypt and decrypt a message and protect it from unauthorized access or use, inorder to ensure security for transactions in a network A public key is a cryptographic

key that can be used by any person to encrypt a message so that it can only be decrypted

by the intended recipient with their private key A private key, also known as a secretkey, is shared only with key’s initiator The public key needs to be shared widely with

* This was invented by Ronald Rivest, Adi Shamir, Leonard Adlenun

others so they can use it to encrypt information they want to send The private key, on

the other hand, is kept by each individual to decrypt the messages they receive.

1.1.6 Distinct characteristics of Blockchain technology

a ImmutabilityImmutability is undoubtedly one of the most outstanding features of blockchaintechnology and also brings out the best use cases of smart contracts that can be deployed.Blockchain is distributed ledger, which means that no central point of authority cancontrol it Once data is recorded on the blockchain, it can not be altered or tampered withwhich provides high data integrity and prevents unauthorized changes At any point intime, when a hacker tries to compromise the data, he/she will soon realize it would benearly impossible to do the same when it is managed with more than two servers or

nodes 35

b Consensus mechanism

Proof of Work and Proof of Stock are prime examples of what is considered a

consensus mechanism It is aimed to achieve a single state of blockchain among allparticipating nodes over a network in order to achieve a fault-tolerent, consistent system.This allows the network to maintain a shared version of the truth, even in the presence

of malicious actors In contrast, traditional databases rely on a single entity or a smallgroup of entities to maintain the integrity of the data Consensus mechanism in adistributed ledger is entirely automated and it is executed as programmed This way,users trust the technology, rather than a third party, for the integrity of a blockchain

c Enhanced security

By using shared, distributed and immutable ledgers that can only be accessed bymembers with permission, users’ data will be protected from fraud and unauthorized

activities Privacy issues can also be addressed on blockchain by anonymizing personal

data and using permissions to prevent access Information is stored across a network of

computers rather than a single server, making it difficult for hackers to view data This

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security aspect is ensured because blockchain is built based on the principles ofcryptography, decentralization and consensus, which ensure trust in transactions In mostblockchains or distributed ledger technologies, the data is structured into blocks and eachblock contains a transaction or bundle of transactions Each new block connects to allthe blocks before it in a cryptographic chain in such a way that it's nearly impossible totamper with All transactions within the blocks are validated and agreed upon by a

consensus mechanism, ensuring that each transaction is true and correct 26

d Automation

Here comes the concept of ‘smart contract’ which increases efficiency and thespeed of the process Once the conditions are pre-specified, all the next steps in theprocess of the transaction will be automatically triggered By automating establishedprocesses, blockchain technology will help increase the overall performance of services

exponentially, minimizing human intervention

1.1.7 Practical use of Blockchain technologyBlockchain distributed ledger technology is foundational The use of blockchainswill garner significant efficiencies in global supply chains, financial transactions, assetledgers, and decentralized social networking These industries below are examples ofhow blockchain technology is applied into daily lives

Firstly, Blockchain is majorly useful for its automatic characteristics Forexample, financial institutions only operate during business hours, usually five days aweek That means if you try to deposit a check on Friday at 6 p.m., you will likely have

to wait until Monday morning to see whether that money has arrived at your account yet.Even if you make your deposit during business hours, the transaction can still take one

to three days to verify due to the sheer volume of transactions that banks need to settle.This scenario will not happen with the presence of blockchain It only takes minutes,

maybe seconds, to add a new block into the bank’s blockchain system which leads to thesheer decrease in time it would take for consumers to see their transactions being

processed

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Blockchain helps in the process of money transfer by cutting out the middleman,which makes it cheaper and much more convenient, especially when transferring money

across border One of the most famous applications of blockchain revolves aroundcurrency, and to be specific, cryptocurrency (Bitcain is prime example) It removes allthe problems of modern banking because there is no single point of failure A singlepoint of failure happens when a vital part of a system ceases to function, thus causingthe entire system to fail It is a virtual currency that is used as a medium of exchange Itworks in a similar way to any other currency, it just is not tangible and operates usingcryptography This is a way to protect information using code, so that only the relevant

parties have access to it a

Secondly, blockchain can be helpful in the real estate business The real estatemarket will change for sure Homeowners buying or refinancing property are subject tosignificant transaction costs, including title insurance, where the title search process can

be labor intensive An individual can put a property on the blockchain so that prospectivebuyers can review and verify the owner of a property Smart contracts, self- executingagreements on the blockchain, can automate property transfers and eliminate the needfor intermediaries, which save time and money on closing costs All property details anddocuments can be stored securely on the blockchain, allowing potential buyers andinvestors to easily access and verifyinformation, streamlining the due diligence process

Moreover, blockchain can facilitate the division of property ownership intosmaller tokens This allows for fractional ownership, making real estate investment moreaccessible to a wider range of people with smaller budgets By tokenizing a property on

a blockchain, a developer removes the need for traditional bank financing and freesthemselves from the traditional sales timeline constraints oninvestm ent property On thebuyer’s side, expanding or decreasing a position is as easy as finding a buyer or sellerfor a share of the property

Thirdly, Blockchain can empower patients to control their own medical records.Data would be stored securely on a blockchain, allowing patients to grant access to

* Jefferey Smith (2022), Blockchain Development Blockchain Applications , Jefferey Smith,pp.17.

specific healthcare providers or researchers with their consent This improves data

privacy and ownership for patients Blockchain technology can improve control of healthrecords and patient care by providing greater transparency, accountability, and dataprotection It allows for authenticated data collection during clinical trials, ensuring thequality of results In the supply chain, it ensures the protection, validity, and timeliness

of the supply of medicinal products Blockchain also addresses issues of confidence,protection, confidentiality, and data interoperability in healthcare

Blockchain technology has a significant potential in the medical field by enablingthe secure and private storage of people's identity and medical records while facilitatingthe sharing of medical information Before and after the different clinical study phases,

a significant amount of patient information and health data is generated There are manypeople's blood tests, quality assessments, estimates, and wellness polls It can provideresults that show the existence of some document or record Healthcare providers

traverse the stored data and suspect its validity, and they will check this seamlessly bymatching it to the original records stored on the Blockchain system Blockchainis based

ơn existing cryptographic techniques, which include the appropriate framework forcryptography for data sharing The patient's name, date of birth and diagnosis,treatments, and ambulatory history are recorded in electronic health record format duringpatient details by the healthcare provider This information is stored in cloud computing

or the current databases.

Fourthly, blockchain technology is linked with Non-fungible tokens (NFT)).They are assets that have been tokenized via a blockchain These tokens are uniqueidentification codes created from metadata via an encryption function, which are thenstored on a blockchain, while the assets themselves are stored in other places NFTs can

be traded and exchanged for money, cryptocurrencies, or other NFTs—it all depends on

the value the market and owners have placed on them A specific example of an NFTapplication involves artists placing their artworks on a blockchain In this process, the

** Abid Haleem, Mohd Javaid, Ravi Pratap Smeh, Rajiv Summ, Shanay Rab (2021), Blockchean techmology

applications in healthcare: An overview , itemutional Jounal of Intelligent Network ,pp 20.

artwork is digitized on the NET platform with its own unique token identifier Once

information is recorded on the blockchain, it is stored permanently and cannot bechanged, demonstrating that the artist is the original creator of the artwork A commonmisconception regarding NFTs is that the image, video, or other digital item is the NET.However, the token itself is hashed information stored on the blockchain The digitalitem, tagged with metadata, is stored somewhere else, like Amazon Web Services orother hosting services Thisis why you can right-click on the picture on an NFT auctionsite and save it—it is only the image But your copy does not have the data associated

with the NET, so you're not the owner In a sense, you have a forged copy Mike

Winkelmann (also known as Beeple), a digital artist known for his groundbreaking work

in the realm of digital art, has sold one of his digital works named “Everyday: The first

5000 days” at auction for $69.3 million on Christie’s— an online digital artwork auction,

which made the artwork one of the most expensive artworks by a living artist ever sold.

Fifthly, blockchain can be helpful with a government A blockchain-based digital

government can protect data, streamline processes, and reduce fraud, waste, and abuse

while simultaneously increasing trust and accountability On a blockchain-basedgovernment model, individuals, businesses, and governments share resources over adistributed ledger secured using cryptography This structure eliminates a single point offailure and inhereAtly protects sensitive citizen and government data Hence, it enablesthe creation of transparent and immutable records of government transactions andactivities by storing data in a decentralized and tamper-proof manner which enhancestransparency, reduce corruption, andincrease accountability in government operations

The government can also utilize blockchain in their voting system, which has thepotential of improving the integrity and security of elections by providing a tamper-

resistant platform for recording and verifying votes Through features like cryptographicencryption and decentralized consensus mechanisms, blockchain can help prevent fraud,

manipulation, and tampering in electoral processes Citizens can cast votes the same way

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they initiate other secure transactions and validate that their votes were cast—or evenverify the election results Potential solutions are currently working to blend securedigital identity management, anonymous vote-casting, individualized ballot processes(for example, a vote “token”), and ballot casting confirmation verifiable by (and only

by) the voter 3! Recently, The Australian government-owned Australia Post has unveiled

plans that it will conduct tests through digital voting via the blockchain technology in a

bid to reduce costs and improve efficiency of parliamentary election?

Moreover, blockchain-based platforms can streamline the delivery of publicservices by facilitating secure and transparent transactions between government agenciesand citizens For example, blockchain can be used to track the distribution of governmentbenefits, verify the authenticity of documents and credentials, and improve the efficiency

of administrative processes One of the real life practical applications of blockchain inthe governmental and administrative aspect belongs to Estonia — a country which is

currently utilizing a technology named Keyless Signature Infrastructure (KSI33) to

safeguard all data Electronic health records of all Estonian citizens are managed usingKSI technology KSI creates hash values which represent larger amount of data as muchsmaller unique values KSI allows officials to monitor changes within databases — whochanges a record, what changes are implemented, and when are they made, hence, anyunauthorized tampering of the records can be detected and prevented

Before the term "Fintech" came into common usage, the financial technologyindustry was already evolving rapidly to meet the growing demands of globaltransactions As the volume of transactions increased, there was a need for moreadvanced technology solutions to expedite processes and reduce costs associated withtrading securities like equities Traditional trade processes within asset managementwere often slow, manual, and prone to errors, especially when dealing with complextransactions such as cross-border trades and nonstandard investment products like loans

ˆ! Bpa#er Karanjia, Aanchal Garg Karanch, Sudeepta Veerapmeni, Saurajt Goswrami, Akankcha Shamma, Mino}

Boda (2018), Blockchean in the Public Sector — Tranufonming Government Services through Exponential

Technologies, Deloitte , India.

'* tps:/ãvtrw voteaustralia org awolockchai voting accessed on March 30,2024

` tips //e-estonsa cob/ accessed an March 30,2024

Currently, each party involved in a trade maintains its own copy of the transactionrecord, leading to inefficiencies and potential errors Many trades encounter errors,necessitating manual intervention and prolonging the settlement process By leveragingblockchain technology, which does not rely on a centralized exchange for transactionverification, clearing, and settlement, significant cost savings can be achieved globally.Blockchain enables shorter settlement windows and can potentially customize settlementprocesses, leading to reduced fees and capital charges across various financialinstruments such as equities, foreign exchange, commodities, and over-the-counterderivatives.

It can be seen that the growth of global transactions has required more and mareadvanced technology applications to speed up and reduce transaction costs for securitiessuch as equities In reality, a fair amount of trade have errors which require manual

intervention and extend the time required to settle trades Blockchain technology proves

to be useful by eliminating significant fees across FX34, commodities and OTC

derivatives, which could lead to substantial infrastructure cost savings, effective datamanagement and transparency, faster processing cycles, minimal reconciliation, and thepotential removal of brokers and intermediaries altogether 36

Blockchain has the potential to simplify and streamline the entire trade life cycle

by providing an automated process where all parties involved have access to the sametransaction data This enhanced transparency and efficiency can result in substantial costsavings, improved data management, faster processing times, reduced reconciliationefforts, and even the elimination of certain intermediaries and brokers from the process.1.2 Definition, general knowledge, and practical use of Smart contract

1.2.1 Definition of Smart contractBlockchain smart contract has received significant attention not only fromstartups and financial technology companies but also from other businesses across a

“ Foreign exchange or Forex

** Over the counter

'* Joseph J Bambara, Paul R Allen (2018), Blockchain — Á practical guade to developing brsmwsses, love and

technology solutions , Mic Gravw-Hill Education, New York.

broad range of industry sectors Business operators and tech companies have alreadyrealized the potential of smart contracts and started the process of implementing smartcontracts in their business operations in recent year with the belief that smart contractwill enable the clients and themselves to conclude transactions in a much faster and more

cost-efficient tim e.37

The worlđis built on trust, from the chips in smartphones to cards which containmoney in the wallets, everything came together as a result of people and organizationstrusting each other ŠŠ When put into regular basis activities, it can be seen that everythingapplies the same principle, which all revolves around trusting each other A dollar billwill only make sense if people choose to trust its value, since it is merely a piece of paperthat they exchange for items like food and electronics People make agreements withinstitutions and organizations whom they trust, in the hope that they will uphold theirobligations according to what they have agreed upon; for example, people make

agreements with institutions such as governments and legal firms to ensure wrongdoers

suffer the consequences that they deserve Legal contracts are a tradition medium inwhich agreements are expressed and confirmed Two parties agree to a set of terms,trusting that a third party will step in to justly mediate disputes and enforce the terms ofthe contract if the terms of the agreement have been violated

However, tradional legal contracts have a major problem: They are often open tointerpretation Disputes about wording always happen, both in normal conversation innormal daily activities to official documents Although aiming for the utmost precision,the human languages still rarely mean the same thing to two different people regardless

of the similarities in their knowledge base This can be easily negotiated in normalconversations between people, however, it would be a critical issue when it comes toterms and wording of a legal contract, where precision is required at the highest level

and there is no room for misinterpretation, hence the idea of smart contract

? Boonyaom Na Pombejra (2016), The rise of Blockchain: An analysis of the Enforceability of Blockchain Smaat Contracts, Trammuasat University ,DP 3.

'* Riclurd Ma, Jan Gormy, Edvard Zulkoski (2019), Froxiamentals of Smart contract seciatty: , Momentum Press Engineering, pp 23.

The concept of smart contract was conceived by an Amercan crytographer and.

programmer named Nick Szabo in 1994, way before the birth of blockchain in 2009 39

He defined smart contracts as a “Set of promises, specified in digital form, includingprotocols within which the parties perform on these promises” According to LarryADiMatteo, “Swart contracts are literally code computers, which are placed on ablockchain, a distributed system that rims on the computers of thousands of digital usersand two or more parties, where some or all of the parties put in thier assets and theseassets are automatically redistributed between the parties according to a formula based

on certain data not known when the contract commenced“ To be fair, there is no

canonical definition of a “smart contract.” Smart contracts may also be considered

“self-executing transactions” Ì Besides, each scholar has a different set of definition of their

own, but those sets certainly express some of the same principles when being comparedwith others

Besides the views stated by the scholars, the definition of smart contract is also

recognized by a number of countries and organizations The Commodities Futures TradeCommission’s LabCFTC describes smart contracts as “a set of coded computerJimctions, which may incorporate the elements of a binding contract (e.g offer,

acceptance, and consideration), or may simply execute code’ The Malta Digital

Innovation Authority Act has provided a through definition of smart contract Inparticular, it contains these specific features: “(i) it is a computer protocol; and or (ti)agreement concluded wholly or partially in anelectronic form, whichis automatable andenforceable byexecution of computer code, althoughsome parts may requirelhnanan inputand control and which may also be enforceablebyordinary legal methods or by a mixture

of both’*? The Chamber of Digital Commerce defines a smart contract as “computer

1a 26

“© Lamy A DiMatteo, Miche] Carevrsa and Cristina Poncibd (2019), Swcot contracts caxd contract leew, The

Cambridge handbook of smart contracts, blockchcan teclmology and digital platforms , Cambridge University

spans Filppi and Samer Hassan (2016), Blockchain Tecimology as a Regulatory Technology ,Havard

code that, upon the occurrence of a specified condition or conditions, is capable ofrunning automatically according to prespecified fimctions The code can be stored andprocessed on a distributed ledger and would write any resulting change into the

distributed ledger “**

Based on the above analogies, although there are many different ways tounderstand what exactly is smart contract, it can be concluded as: (i) it is a computerprogram and (ii) similar to terms in traditional legal contracts, smart contracts alsoinclude terms but is encrypted and automatically executed on the blockchain platformwithout outside intervention or through a third party intermediary

1.2.2 General information of Smart contractUnderstanding how smart contract works play a vital role in the process ofanalyzing its characteristics and how it is superior to traditional contracts Whenscientists are developing the blockchain technology, they proposed to store morecomplex types of data on the blockchain; not just pure data, they are now executable

programs Smart contracts were bom after the scientists succeeded with Bitcoin and were

deemed to be programmed to autonomously behave in a gven manner when certain

conditions are met

To get a clearer view, it is often considered metaphorically that a smart contracthave the same function as a vending machine A vending machine is designed to release

a product contained inside its chamber when an appropriate amount of money is inserted,for example a drink or a snack Smart contract works the same way by automaticallyexecuting a term of the contract when certain conditions are met In a vending machine,the transaction occurs without the need for a store clerk to facilitate the exchange Thevending machine is programmed to automatically release the product when the correctpayment is received In the same way, smart contracts contain codes, which areprogrammed to automatically execute the terms of an agreement; the codes will beautomatically enforced

“ Jordan Earls, Mark Smith, Ronald Sunith (2018), Swart Contracts: Is the Law reacdy?, Chamber of Digtel

Commerce , Washington.

The Cambridge Handbook of Smart contract and Blockchain" has delivered an

interesting example as to how smart contract works in real life through two fictionalcharacters: Alice and Bob The story can be summarized as follow: Alice is Bob’sgrandmother One day she decided that she would incorporate her will in the form of asmart contract, and to be specific: sending Bob all her money (in the form ofcrytocurrency) when she passes away She additionally set a furthur condition in which

he could receive the money earlier if he graduates from college Alice then determinedthe following variables:

(@) owner_alive: this initially is set to true as to indicate whether she was alive or not,(ii) benef_address: to store information of Bob’s banking account (the beneficiary);

(iit) benef_graduated: set to false to indicate whether Bob graduated from college or not;

Alice also set some codes for different functionalities which serve different

in utilizing a smart contract to formalize their agreement may opt to either employ anexisting smart contract or develop their own When creating their own smart contract,one or both parties will outline the terms of their agreement and translate them into

computer code, with the expectation that the code accurately represents the terms and

achieves the desired outcome upon execution Most smart contracts enable code to

43 See page 7 of The Cambride Handbook af Snurt contract and Blockchain to leam more about this scenario

initiate actions at predetermined times or in response to specific events reported to thesmart contract code These events could include various occurrences such as the outcome

of a sports match, temperature readings, wave heights, voting results, or transactionconfirm ations

However, this simplified portrayal of smart contracts overlooks substantialcomplexity and ambiguity Translating legal concepts into executable code may result inthe loss of critical nuances, leading to ambiguity, confusion, and potential enforceabilityissues Moreover, technical challenges may arise, hindering faithfully translatedagreements from being executed as intended

1.2.3 Distinct characteristics of smart contract

a DecentralizationSmart contracts start from the roots of blockchain technology which involves

information recorded on blocks in a decentralized way rather than being controlled by a

single entity, all linked together by nodes which works on a “peer to peer” behaviour.

As created by programming language, smart contracts are not manipulated by humaninterventions Hence, smart contract will be working on the foundation of consensusmechanism, as well as increasing security and confidentiality Smart contracts will not

be controlled solely by one party because data on the blockchain is saved and exchangedacross network nodes, rather than existing on a single server, as demonstrated by the factthat the data can not be easily tempered with and can only be changed when an agreementbetween the participants of the network has been made

b Third party intervention is mitigated

As explained above, due to the nature of being programmed in codes, which arethen executed in a peer to peer network, curated and managed by linking nodes, hasenabled smart contracts to run fully automatic without the need of a specific authoritative

unit to control it Unlike traditional contracts that often require intermediaries or trustedthird parties to validate and enforce agreements, smart contracts operate autonomously

on blockchain networks By leveraging cryptographic techniques and consensusmechanisms, smart contracts ensure that contractual terms are executed automatically

and transparently without the need for intermediaries This eliminates the risk of

third-party intervention, manipulation, or bias, thereby enhancing the security and

trustworthiness of transactions

Computation can be performed between untrusting peers without the risk ofinterference, as all computations within a public blockchain network such as Bitcoin andEthereum are performed by thousands of different entities These entities can trust thatthe messages they are sharing between each other are legitimate because each entityverifies that the messages they receive follow the strict rules of the peer to peer

network * Therefore, two people can easily set up a smart contract by using blockchain

as a third party while living in assurance because manipulating networks requiresclaiming control of a majority of the voting power in the network, which is a difficulttask to do

c Automation

As expected, one of the key advantages of smart contract has to be automation.

Smart contracts execute code-driven commands on hardware and software systems,often without the need for a human to trigger their execution The ability to createagreements that automatically execute their terms, without resort to the formalities ofany legal system, has been argued to be a form of novel “private law without a publicauthority.” This is why smart contract can be applied from trivial aspects to fullautomation of the entire contract Automation of smart contracts revolutionizes thetraditional landscape of contract execution by enabling seamless and autonomousenforcement of contractual terms and conditions through code, without the need forhuman intervention Once deployed on a blockchain network, smart contracts operateindependently, executing predefined actions automatically when specific conditions orevents are met This self-executing nature of smart contracts offers a myriad of

advantages, including:

* Rxlurd Ma, Jan Gormy , Edward Zulkoski (2019), Floxdawentals of Smart contract security, Momentum Press Engiveering, pp 23

+’ Daniel T_ Stabile , Kimberly A Prior, Andrew MỸ Hinkes (2020), Digital Assets amd Blockchamn Tecimology:

US Love and Re gidation,pp 242.

(@ Enhancing efficiency by streamlining the execution of contractual obligations,

reducing the reliance on manual processing and administrative tasks

(ii) Promoting transparency by leveraging the immutable nature of blockchain,ensuring that all parties have access to the same transparent view of the contract'sexecution, thus fostering trust and accountability

Additionally, automation minimizes the risk of human error associated withmanual contract execution, ensuring that contractual terms are enforced accurately andconsistently Moreover, by eliminating intermediaries and reducing the need for manualintervention, smart contracts can lead to significant cost savings, both in terms ofadministrative overhead and transaction fees

Overall, automation in smart contracts enhances reliability, speed, and efficiency,making them a powerful tool for streamlining business processes and facilitating

trustless transactions in various industries

1.2.4 Practical use of Smart coutractSmart contract has been applied in a variety of scenarios and sectors Suchapplications could range from financial to public (e.g vehicle registries), semipublic (e.guniversity degrees), and private (e.g wills) as well as intangible (e.g coupons) and

tangible (e.g, electronic hotel room keys) assets * Not only industries but also individual

customers could benefit from the vast applicability of smart contracts, which can belisted below

In finance, smart contracts are revolutionizing the finance industry by providing

a secure and efficient way to execute financial agreements and transactions without theneed for intermediaries, since it is based on the blockchain technology These self-executing contracts are encoded on blockchain networks, ensuring transparency,immutability, and reliability In finance, smart contracts are being utilized in variousways, from lending and borrowing to trading and investment management Apart fromthe benefit of reducing most of the time during transactions between banks and

“Shap Medracapital comv/blog/2014/3/1 Moitcomn-serizs-24-the-mega-master-blockchain-list acessed on March 30, 2024

consumers as mentioned in the practical use of Blockchain technology above, theapplicability of smart contract can be further utilized in finance.

One significant application of smart contracts in finance is in decentralizedfinance (DeFi) DeFi operates based on open protocols and decentralized applications,with agreements being executed through smart contracts DeFi platforms leverage smartcontracts to create decentralized lending and borrowing protocols, allowing users toborrow funds or earn interest on their crypto assets without relying on traditionalfinancial institutions These smart contracts automatically execute lending andborrowing agreements, collateralize assets, and distribute interest payments, all whilemaintaining security and transparency on the blockchain

Smart contracts also play a crucial role in facilitating automated trading andinvestment strategies Through decentralized exchanges (DEXs) and automated market

maker (AMM) protocols, traders can execute trades directly through smart contracts

without the need for centralized intermediaries These smart contracts enable instant and

permissionless trading of digital assets while ensuring the integrity of transactions andprotecting users’ funds

Whenit comes to prachasing orders, several applications exist to record valuablegoods in order to prevent counterfeiting By using unique identifiers, such as QR codes,RFID tags, or NFC chips, consumer can link each product to a smart contract that storesits information on the blockchain so that they can verify the authenticity and provenance

of a product at any point, thus prevent unauthorized or fraudulent transfers For

instance, luxury brands can promote their products such as a diamond ring or a luxury

watch through a digital form called NFT,°° a unique digital asset that represents

ownership of a specific item A product can then be recorded on blockchain and then

becomes a permanent and unchangable record of ownership, which keeps a productgenuine and authentic.*!

39 hftps Jim Inkedin com/advice/] Aow-can-you-use-suuit-contracts-prevent-counterfeiting accessed an

March 30,2024

5° Mentioned above m Blockcham and NET

*)atps /Avvrw Lionsarbet com/e duc ation ifts-and-hvary-brands-gams-changer accessed on March 30,2024

A smart contract proves to be extremely useful when it comes to the insurancefield When used in insurance, smart contracts introduce effective automation ofcustomer risk scoring, policy issuance, claim validation, regulatory reporting, and otherrule-based manual workflows They instantly intake and process data from an insurer’scorporate systems and relevant third-party sources to accelerate underwriting and claimresolution cycles In addition, smart contracts help prevent fraud and compliancebreaches and improve data security by providing immutable records of insurancetransactions and events One of the primary benefits of smart contracts in insurance isthe automation of policy management Smart contracts can be programmed toautomatically execute policy terms and conditions based on predefined triggers orevents For example, when a premium payment is received, the smart contract canautomatically issue or renew a policy, update policy details, and generate policydocuments, all without the need for manual intervention In claims processing, smart

contracts can facilitate faster and more efficient settlements Claimed data can be

recorded on the blockchain in real-time, and smart contracts can automatically verify thevalidity of claims based on predefined criteria Once validated, the smart contract cantrigger the disbursement of funds to the policyholder, providing expedited claimsprocessing and reducing the potential for fraud

Smart contracts profoundly improve customer experience and reduce operatingcosts by setting up terms in which those terms can be triggered if a customer suffers agiven situation, such as a flight delay If a flight is delayed and the customer does nothave time to fill in insurance form, although they have already registered for a flightinsurance, smart flight insurance would come in handy by automatically compensate thatcustomer if data is sent back to the system, indicating that particular flight is indeed

cancelled 52

In the insurance field, undervritting is an important process in which the lenderdecides whether an applicant is creditworthy and should receive a loan Smart contract

* Andrea Gaggioli, Shayan Eskandari, Pietro Cipresso ,Edoardo Lozza (2019), The Middleman Is Dead Long

Live the Middleman: The “Trust Factor” and the Psycho-Social Iuplications of Blockchain Frontiers mì

Blockcham 2:20,pp.9.

has the potential to inprove the accuracy and transparency of undenvriting processes Bystoring policyholder data and risk information on the blockchain, smart contracts canautomate risk assessment and pricing calculations This not only speeds up theundenwriting process but also ensures consistency and fairness in pricing decisions.

In the real estate business, smart contract can store records of property rentalsand exchanges on blockchain.? By relying on a unique shared ledger, smart contractcould reduce information fragmentation (e.g home for rent, sales are usually advertised

on a variety of portals) In property rentals, smart contracts can automate various aspects

of the rental process, from lease agreements to rent payments and maintenance requests.The involved parties’ identities in a lease agreement can now be easily verified, togetherwith their previous history They could also undersign a sell/lease agreement based on asmart contract; ensuring that payments are made on time and accurately Tenants can set

up recurring payments through the smart contract, which automatically transfers the rent

amount from their account to the lendlords account on the specified due date This

streamlines the payment process and reduces the risk of late or missed payments

Additionally, smart contracts can facilitate maintenance requests and propertyinspections Tenants can submit maintenance requests through the smart contract, whichnotifies the landlord or property manager automatically The smart contract can thentrack the status of the request, schedule repairs, and verify completion Propertyinspections can also be recorded on the blockchain, providing an immutable record ofthe property's condition at various points in time By automating key processes, reducingadministrative overhead, and enhancing trust between landlords and tenants, smartcontracts can streamline the rental experience and create a more seamless and hassle-free renting environment

Smart contracts are also used in cloud storage In this scenario, users can rent out

space in their hard drives, and a smart contract would automatically provide them withareimbursement Systems such as this one split portions of encrypted users’ files among

» Bmaftr Karanjia, Aanchal Garg Karanth, Sudeepta Veerapaneni, Sauraj# Goswami, Akanksha Shamu , Manoj

Boda (2018), Blockchean in the Public Sector — Tranuforming Government Services through Exponential

Technologies, Deloitte , india.

several computer nodes and, before storing them, compute their hash to discover whetherthe same file has already been stored on the network (thus avoiding duplicates) Smartcontracts are also applicable in the entertainment spectrum, for example in the musicindustry Emerging music artists depend on streaming income as they get started in theindustry Smart contract applications can make royalty payments easier For instance,these contracts can include which percentage of the royalty income goes to the recordlabel and the artist These payments can happen instently, which is a major win for allparties involved In elections, smart contracts could create a secure environment forvoting, reducing the risk of potential voter manipulation since each vote is ledger-protected Due to the encryption, these are incredibly hard to decode Smart contractscould also increase voter tumout With an online system powered by smart contracts,there is no need to travel to a polling station to submit your vote.

Smart contract can also be utilized in healthcare According to a recent study by

Johns Hopkins®’, more than 250,000 people in the United States die every year because

of medical mistakes, making it the third leading cause of death after heart disease andcancer Thousands of lives could be saved annually if smart contracts could be utilized

to improve patient medical record data, drug supply chains and medical collaboration.Smart contracts have the potential to revolutionize various aspects of the healthcareindustry They can be utilized for tasks such as managing patient data securely,facilitating transparent and efficient payment processes between healthcare providersand insurers, automating insurance claims processing, ensuring compliance withregulatory requirements, and even enabling patients to have greater control over theirown medical records while maintaining privacy and security

One of the leading applications of smart contract in healthcare is electrical health

record Compared with traditional paper-based medical records, electronic health records(EHRs) are widely used because of their efficiency, security, and reducing dataredundancy By storing health records on a decentralized and immutable ledger,

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$s }utps /rym hopkinsmedic me orghevsimediateleasesismudy suggests medical axors now third leading ca

use of death m the us accessed on March 30,2024

blockchain ensures that sensitive medical data remains secure and tamper-proof Each

transaction recorded on the blockchain is cryptographically linked to the previous one,

creating a transparent and auditable trail of data access and modifications The EHRshave the potential to revolutionize the healthcare industry by enhancing data security,accessibility, interoperability, and patient empowerment

According to a report conducted by Grand View Research, the global healthcaresmart contracts market size was valued at USD 1.6 billion in 2021 andis expected toexpand at a compound annual growth rate (CAGR) of 20.5% from 2022 to 2030 Theintegration of modem computer technologies like smart contracts enhances thecapabilities of healthcare organizations, addressing challenges related to secure datasharing across platforms Improved data collaboration among healthcare providers hasthe potential to enhance treatment effectiveness, diagnostic accuracy, and costefficiency Smart contracts function as rule-based coding mechanisms, automating

processes and reducing human intervention in platforms, thus simplifies tasks and

reduces costs for both individuals and organizations, thereby contributing to market

expansion.

Conclusion of Chapter 1

In conclusion, Smart contract is one of the leading trends in the current technologyera where the most complex and advanced technology is applied to daily activities inorder to facilitate living standards generally Smart contract are basically a form ofelectrical contract with upgrade with distributed ledger technology The differences of asmart contract can be summarized below:

@ Technology: Smart contract is applied with blockchain technology with

programmation of if-then commands Therefore, the process is automaticallyexecuted, which means if a party satisfies a pre-programmed and agreed uponconditions between the two parties, smart contract will automatically fulfill the

*“hitps Jn granudvievrrese arch <omv/auhistry- analysis ihe alti

are-smaat-contracts-murket-report text=> USD % 201 78% 20billion% 20in% 202022 accessed on March 30, 2024

Transparency: Smart contract shows its superiority when ensuring that it can not

be altered or tempered with easily, due to the fact that a change in the contract 1sonly authorized upon approval of all the individuals relating to that contract Thiswill ensure that the contract cannot be altered in any way by an outside party,maintaining its high level of security and transparency

Therefore, smart contract is applied in many different fields such as electronicpayment, insurance, NFT, real estate transactions, intellectual property or even in

elections Overall, smart contracts are promoted mainly for their transparency and

security, while minimizing third-party intervention.

CHAPTER 2: LAW ON SMART CONTRACT IN THE UNITED STATES

1.1 Practical use of smart contract in the United States

1.1.1 Starter interrupter

As previously described, smart contract is getting recognized broadly in terms ofits distinct characteristics which make it superior when being compared with the use oftraditional contract in fields such as insurance, NFT, cloud storage, real estate transaction

to medical healthcare, logistics, etc In the United States, one of the technologies that areembraced recently due to the fact that it is integrated with a distributed ledger system, is

a starter interrupter It is a device which tracks a motor vehicle purchaser’s or lessee’sscheduled payments under a financing or lease agreement and prevents the vehicle fromstarting if a scheduled payment is not received by its due date or within any applicablegrace period This device typically requires the consumer to enter with a code for eachpayment codes that will allow the vehicle to continue to start from the creditor when

payment is tendered‘? When regularly-issued codes have expired, the creditor will

provide consumers with one or more “emergency codes” to permit operation of thevehicle Some devices also include a Global Positioning System (GPS) trackingcapability

Here, a question has beenraised: Given that there are numerous ways to guaranteecontract execution, why is a starter interrupter required when performing a loanagreement between a purchaser and a lessee? With normal methods of ensuring car buyerwill pay in installments, the guarantee rate in which they will pay the full amount ofmoney on time as stipulated in the loan contract between the buyer and the seller is notpromising because there will be cases where car buyers leave their living areas and taketheir vehicle (which is still in the process of being paid in installments) with them The

United States is a large country with many states with different terrains, cultures and

most importantly, different legal regulations Hence, the idea of catching these peopleseems to be an impossible task for the authorities Starter interrupter is created in

3ï Thomas B Hudson, Daniel J Lauä% ma (2006), “The Emerging Law of Starter Interrupt Devices”, The

Business Layer, Vo161,(No 2),pp 843