Imagine that you need to sell a pack of shares. In the legacy world it is a process which entails paperwork, communication with different firms such as stockbrokers, lawyers and various people and involves a number of risks. That’s why the absolute majority of investors decide to find an agent, broker, exchange or generally a service provider, who deals with all the formalities and acts as an intermediary, overseeing the deal until it’s closed.
Moreover, the intermediary provides an escrow service, which is especially useful in such transactions, as the sums involved are normally quite big and you can’t really fully trust the person you will be dealing with. Nevertheless, after the successful deal, the seller’s and the buyer’s brokers will share around 3 percent of the sale price as their commission. This amounts to quite a substantial financial loss. This is exactly one of the problems that EDSX resolves.
It’s situations like this where smart contracts could really come in handy and effectively revolutionize an entire industry, all the while making the process a lot less of a burden. Most importantly, they would solve a trust issue. Smart contracts work on an ‘If-Then’ principle, which means that the ownership of the equity will be passed on to the buyer only when the agreed upon amount of money is sent to the seller via the system.
They also work as escrow services, meaning that both the money and the equity ownership right will be stored in the system and distributed to the participating parties at exactly the same time. Moreover, the transaction is witnessed and verified by hundreds of people (the nodes of the blockchain), so the faultless delivery is guaranteed. As trust between the parties is no longer an issue, there is no need for intermediaries. Note that EDSX is not an intermediary but merely rules of the game setter as it provides the smart contract digital templates for parties to use and a place for them to meet and find each other. All the functions that a stockbroker, custodian or an organised marketplace do can be pre-programmed into a smart contract, while simultaneously saving both the seller and the buyer considerable amounts of money.
How do smart contracts work
Simply put, smart contracts work a lot like vending machines. You just drop a required amount of a cryptocurrency into the smart contract, and the digital securities, or whatever else drop into your account. And vice versa, you just drop the digital securities into the smart contract, and the equivalent amount of a cryptocurrency, or (or another digital asset in case of swaps) drops into your account. All the rules and penalties are not only pre-defined by smart contracts but are also enforced by them. And the role of EDSX is exactly this to define a set of conditions that potential parties or users will find useful.
A smart contract can work on its own, but it can also be implemented along with any number of other smart contracts. They can be set up in a way when they’ll be dependant on one another. For example, successful completion of one particular smart contract can trigger the start of another one, and so on. In theory and in an ideal world, whole systems and organizations can run entirely on smart contracts. To some extent, this is already implemented in various cryptocurrency systems, where all the laws are pre-defined and because of that, the network itself can function autonomously and independently.
Objects of smart contracts
Essentially, there are three integral parts, also referred to as objects, to every smart contract. The first one is signatories, the two or more parties using the smart contract, agreeing or disagreeing with the terms of the agreement using digital signatures. At EDSX signatories need to be known to EDSX at all times and that is why they are required to pre-register and undergo a whitelisting process involving KYC. The second object is the subject of the agreement. And when it comes to investment instruments, regulation and compliance do apply. EDSX lets people deal only with regulated and compliant digital securities. In essence, one should know what these digital securities stand for or what rights and value they represent. In addition, this can only be an object that exists within the smart contract’s environment, i.e. digital security and or crypto-currency. In essence, the smart contracts have to have unhindered and direct access to the object. Even though the smart contracts were first discussed back in 1996, it was this particular object that stalled their development. This problem was partially solved only after the first cryptocurrency appeared in 2009.
Finally, any smart contract has to include specific terms. Those terms need to be mathematically described in full and using a programming language that is appropriate for the particular smart contract’s environment. This includes the requirements expected from all the participating parties as well as all the rules, rewards and punishments associated with said terms.
In order for them to exist and function properly, smart contracts have to operate within a specific suitable environment. First of all, the environment needs to support the use of public-key cryptography, which enables users to sign off for the transaction using their unique, specially generated cryptographic codes. This is the exact system that the absolute majority of currently existing cryptocurrencies are using.
Secondly, they require an open and decentralized database, which all parties of the contract can fully trust and which are fully automated. Moreover, the entire environment itself has to be decentralized for the smart contract to be implemented. Blockchains, especially the Ethereum Blockchain, are the perfect environments for smart contracts. EDSX takes use of these tools to create a truly decentralized rules-based meeting point and eliminate any custodianship or intermediation.
Finally, the source of digital data used by the smart contract has to be completely reliable. This entails the use of root SSL security certificates, HTTPS, and other secure-connection protocols that are already being widely used and are being implemented automatically on most modern-day software.
Smart contracts give you:
Autonomy — Smart contracts eradicate the need for a third-party intermediary of facilitator, essentially giving you full control of the agreement.
Trust — No one can steal or lose any of your documents, as they are encrypted and safely stored on a secured, shared ledger. Moreover, you don’t have to trust people you’re dealing with or expect them to trust you, as the unbiased system of smart contracts essentially replaces trust.
Savings — Notaries, estate agents, advisors, assistance and many other intermediaries are not needed thanks to smart contracts. And, by extension, the extortionate fees associated with their services.
Safety — If implemented correctly, smart contracts are extremely difficult to hack. Moreover, perfect environments for smart contracts are protected with complex cryptography, which will keep your documents safe.
Efficiency — With smart contracts you will be saving a lot of time, normally wasted on manually processing heaps of paper documents, sending or transporting them to specific places, etc.
How EDSX uses them
Smart contracts underpin the whole concept of EDSX. They are the main trading or exchange tool. They guarantee the money versus delivery mechanics and eliminate the need money or assets to be held by EDSX, a third-party clearing / settlement provider. All the assets and currencies are held in parties electronic wallets at all times.