Smart contracts represent the evolution of traditional contracts in the digital age. Written in a virtual language, they are capable of executing and enforcing themselves autonomously and automatically based on programmed parameters. The integration of blockchain technology increases their value by enhancing security, transparency and trust among signatories. This eliminates the risks of misunderstanding, tampering or alteration and reduces the need for intermediaries. The promise of smart contracts lies in their potential to simplify complex processes such as buying a house, which typically involves banks, notaries, land registries and extensive documentation. With blockchain and smart contracts, these processes can be simplified, increasing trust, security and transparency between the parties involved.

What is a smart contract?

The smart contract is a revolutionary innovation in blockchain technology, conceptualized in the 1990s by Nick Szabo, an innovator in modern computer science. Sabo, who also invented the virtual currency Bit Gold in 1998, defined smart contracts as virtual promises with protocols to enforce them. While the Bitcoin protocol can be seen as an elementary form of a smart contract, the creation and implementation of these contracts has become much simpler with the advent of Etherium.

Smart contracts function as automated programs or protocols on the blockchain, activating when certain predefined conditions are met. These self-executing contracts, written directly into the code, detail the terms of agreements between buyers and sellers. They play a key role in making transactions traceable, transparent and irreversible, thereby eliminating intermediaries and reducing time delays.

Placed on blockchain networks, smart contracts contain certain conditions that lead to certain outcomes. Their decentralized nature in blockchains ensures accuracy, timeliness and security, making them tamper-proof. This technology is crucial for automating multilateral digital agreements, reducing risks, increasing efficiency, reducing costs, and increasing transparency in various processes.

Moreover, smart contracts go beyond automating contractual actions. Sabo, often considered the real Satoshi Nakamoto (a claim he denies), saw these contracts as mechanisms to extend electronic transaction methods such as POS (point of sale) into the digital sphere. He foresaw their use in complex financial instruments such as derivatives and bonds, enabling complex payment term structures and minimizing transaction costs.

Smart contracts on blockchain are self-executing scripts that automate contractual obligations. They do not contain traditional legal language, but consist of program commands that perform actions when certain conditions are met. These innovative contracts, pioneered by Sabo, have changed the way digital transactions and agreements are conducted, heralding a new era of efficiency and security in the digital world.

How do smart contracts work?

Smart contracts, essentially tamper-proof programs hosted on blockchains, operate on the fundamental logic of “if/when event x occurs, perform action y.” These contracts can cover multiple conditions, and a single application can combine multiple smart contracts for a complex network of processes. Developers can create and deploy these contracts on public blockchains for a variety of purposes, including personal finance applications such as automated yield aggregators.

The appeal of smart contracts lies in their ability to facilitate secure transactions between independent and often anonymous parties without the need for central authorities or legal systems. While Ethereum is currently the leading platform for smart contracts, other blockchains such as EOS, Neo, Tezos, Tron , Polkadot and Algorand also support them. Smart contracts on Ethereum and similar networks are written in various programming languages such as Solidity , Web Assembly and Michelson . Their code is stored on the blockchain, making it transparent and publicly verifiable, allowing anyone to check the contract code and its current working state.

Each node in the network keeps a copy of all smart contracts along with the blockchain and transaction data. When a smart contract receives funds, all nodes execute its code to reach consensus on the outcome, ensuring secure transactions without a central authority. To execute a smart contract on networks such as Ethereum, users typically pay a fee called ” gas”.

Smart contracts work by adhering to simple “if/when… then…” operators encoded in the blockchain. They autonomously perform actions such as releasing funds, registering assets, or sending notifications when conditions are met. The immutable nature of the blockchain ensures that these transactions are permanent and visible only to authorized parties. These contracts may include numerous provisions requiring participants to agree on the representation of transactions on the blockchain, governing rules, potential exceptions, and dispute resolution mechanisms.

Notably, not all blockchains can run smart contracts. While some, including Ethereum, Arbitrum , Avalanche, Base, BNB Chain , support them, others, such as Bitcoin’s underlying blockchain, do not. The difference lies in the blockchain’s ability to execute and store arbitrary logic. Once implemented, smart contracts tend to remain immutable even to their creators, with a few exceptions, providing resistance to censorship or disabling.

Insurance

Parametric insurance is a type of insurance in which the payout is directly tied to a certain predetermined event. Smart contracts provide a tamper-proof infrastructure for creating parametric insurance contracts triggered by input data. For example, crop insurance can be created using smart contracts when a user purchases a policy based on specific weather information such as seasonal precipitation in a geographic location. At the end of the policy, the smart contract will automatically issue a payout if the rainfall at a particular location exceeds the original amount claimed. Not only do end users receive timely payouts with less overhead, but the insurance offering side can become open to the public through smart contracts. A smart contract allows users to contribute funds to a pool and then distribute the collected premiums to pool participants based on the percentage of their contribution to the pool.

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What role DeFi plays in today’s world

DeFi projects play an important role in changing the financial industry and providing new opportunities for people around the world. They allow users to manage their assets without having to turn to centralized organizations such as banks or investment funds. Through the use of blockchain technology, DeFi projects provide the opportunity to create new financial products and services that have not previously been available to a wide audience. In this article, we will look at what types of projects are included in DeFi, how they work, and what opportunities they provide for users.

Decentralized cryptocurrency exchanges

DEX is a decentralized exchange that is one of the DeFi projects. Unlike traditional exchanges where centralized organizations handle transactions, on DEX, all transactions are executed using smart contracts that run on the blockchain. DEX allows users to exchange cryptocurrencies and tokens without having to go through intermediaries. This reduces the risks associated with centralized exchanges, such as the possibility of hacker attacks or complex security policies. DEX also provides faster and more transparent transaction processing.

While on DEX, users can create orders to buy or sell cryptocurrencies. These orders are published on the blockchain and can be seen by all network participants. When the transaction price matches the order price, a smart contract executes the transaction, transferring the cryptocurrency between participants. DEX also provides a liquidity facility that helps in providing higher liquidity for trading certain cryptocurrencies.

One example of a decentralized crypto exchange is Tegro.Finance, which is a popular DEX and uses smart contracts to execute transactions. Overall, DEX is an interesting and efficient DeFi project that allows users to quickly and securely exchange cryptocurrencies on the blockchain.

How decentralized financial institutions work

Decentralized Financial Organizations (DeFi DAOs) are another DeFi project that works based on blockchain technology. They are organizations that are managed through smart contracts and are owned by users, making them decentralized. DeFi DAOs allow users to make decisions on how to run an organization, which are done through voting on the blockchain. Holders of a particular cryptocurrency have the right to vote, and each vote makes changes to further manage the organization. This allows users to act together and manage the financial resources of the organization.

DeFi DAOs provide access to various financial services such as lending, insurance and investing. They allow users to earn money on their investments in projects they deem promising and receive dividends from the income that the organization generates. Overall, DeFi DAOs represent an interesting and promising DeFi project that allows users to manage financial resources and make collective decisions on the management of an organization.

Mechanics of decentralized financial protocols

Decentralized financial protocols are the third DeFi project that also works based on blockchain technology. They are software code written on smart contracts and enable automatic execution of financial transactions without the involvement of a centralized party. DeFi protocols can perform a variety of financial transactions such as lending, cryptocurrency exchanges, staking and more. They allow users to perform transactions directly on the blockchain without having to entrust their cryptocurrency to a third party.

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We have selected for you 5 of the most interesting and active projects using blockchain technology in the insurance industry:

• Etherisc;
• Medishares;
• PAL Network;
• Teambrella;
• VouchForMe.

Etherisc

The startup Etherisc has developed a decentralized insurance platform based on the Ethereum blockchain. The company independently develops products on this platform, and also allows other organizations to use it to create and distribute their own applications, providing them with a common infrastructure, product templates and insurance license as a service.

The company was the first to develop a product for insurance benefits for flight delays. The system allows passengers to purchase an insurance policy using cryptocurrencies or traditional money, and payouts occur automatically when an insured event occurs: flight delays.

The platform is based on open-source smart contracts, which makes the system transparent and ensures a high level of trust. The decentralized nature of the system avoids conflicts of interest. The startup is also working on solutions for hurricane insurance, crop insurance, cryptocurrency wallet insurance and others.

Medishares

Medishares is a decentralized marketplace for mutual insurance for users in various fields of activity. This open-source platform is based on the Ethereum blockchain and uses smart contracts to bring together users who need insurance services with those who provide them.

The MediShares insurance model assumes that by joining the system, insurers contribute a certain amount, providing reserves for insurance claims by purchasing MDS tokens. To incentivize insurers to keep reserves in the system, they are paid a reward in MDS platform tokens. Users wishing to purchase insurance are given access to a smart contract template where they can pay for the insurance at an acceptable amount.

The platform is built on the DAO principle and does not require personal data from both parties, which increases the reliability and privacy of the system. Due to the absence of intermediaries and decentralization of the platform, the insurance commission charged is minimal.

Decentralized applications will be developed for the platform for health insurance, insurance when participating in extreme sports, expensive car insurance and others. The MDS token is traded on 9 exchanges including Huobi Global, Gate.io, Dcoin and others. The full launch of the platform is scheduled for 2019.

PAL Network

PAL Network is a startup from Singapore that is focused on blockchain-based insurance using artificial intelligence and machine learning.

The platform was created to provide insurance coverage to people outside the banking system, bridging the gap between consumers in developing countries and insurance providers. PAL Network provides a new level of accessibility and reduces the limitations associated with the traditional insurance industry.

Teambrella

The startup Teambrella provides users with P2P insurance services. Users of the service join teams and provide insurance to each other.

When an insurance claim occurs, reimbursement decisions are made within the team through discussion and voting, ensuring a transparent process. The openness of the process ensures fair judgments are made and strengthens social relationships. Users do not have to participate in voting all the time, she can appoint a proxy to vote instead. Voting participants are compensated in platform tokens, with rewards varying depending on the user’s trust rating.

Team members are paid from cryptocurrency wallets located on the Bitcoin and Ethereum blockchain, which they control themselves. Private keys to them are stored only inside the client’s individual system.
The Teambrella platform as well as iOS and Android apps are already available to users.

VouchForMe

VouchForMe, formerly known as InsurePal, is a blockchain platform with a unique concept.

The app represents the world first decentralized social insurance based on community endorsement. A similar mechanism is already being used in other areas, such as in lending, where the borrower gets some benefits if they have a guarantor. The main principle of the platform is to provide a discount to insurance company customers if they have guarantors who provide a financial guarantee.

A platform user can ask his friend or acquaintance to become his guarantor on the platform to earn a rather large discount on the insurance premium. The guarantor provides a financial guarantee that will only be withdrawn from them if the applicant violates the terms of the insurance contract. The guarantors are motivated by the instant payout of the platform tokens, which they will be able to keep as investments or sell on the exchange. The platform guarantees that the insured client will receive final compensation if the other party has breached the mutual agreement.

The VouchForMe model is a classic combination of traditional insurance and P2P endorsement on blockchain, backed by social proof. According to the founders, this approach creates a positive incentive for the policyholder to become more responsible. VouchForMe solution is patented. The first web version of the platform is already available to users.

Not only startups are trying to actively implement blockchain in the insurance industry, but also large companies are teaming up to explore the possibilities of this technology in detail. For example, the B3i consortium has brought together insurance giants such as Allianz, Liberty Mutual, Munich Re, Swiss Re, Zurich Insurance Group and others. IBM and Guardtime are actively implementing their own blockchain platform for the insurance industry. We see that blockchain technology can really modernize such a conservative industry as insurance and bring it to a new level of development.

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