Over the past few years, blockchain has caught the attention of mainstream media. In late 2017, an explosion of interest in digital currencies led to a massive influx of new projects and capital. Cryptocurrencies have grown rapidly in value over the past few years. From October 2013 to October 2018, the total market cap of digital currencies grew from approximately 2 to 209 billion dollars.
The Rise Of Smart Contracts
Smart contracts are elegant, decentralized ways of exchanging and managing information. Programmers use smart contracts to write decentralized protocols for finance, supply chain applications, and gaming.
Smart contracts were first introduced with the release of Ethereum by Vitalik Buterin, Gavin Wood and Joseph Lubin and other members of the Ethereum core team. The idea for Ethereum was originally proposed by Vitalik Buterin in late 2013. Prior to Ethereum, there was no versatile blockchain scripting language meant for DApps. A DApp is an decentralized application where code is executed on P2P networks rather than on central servers. Ethereum smart contracts are written in the scripting language Solidity, which runs on the Ethereum Virtual Machine. The original Ethereum Yellowpaper containing an overview of all initial functionality with technical details was authored by British programmer Gavin Wood.
Creating Your First Smart Contract
To learn how smart contracts could help jumpstart your business, it’s important to understand how they work.
Solidity is a programming language designed for writing Ethereum contracts. These smart contracts are commonly used to create digital Ethereum tokens, decentralized tokens that have a limited supply. Below, we’ll briefly describe common practices for creating tokens for both fungible and non-fungible use cases.
“ERC-20” smart contracts are an early token standard proposed by the Ethereum community. ERC stands for “Ethereum Request for Comment” and is meant as a way to solicit community and develop ideas. ERC-20 asks developers to specify a variety of token attributes like token supply, name, decimals, as well as include a set of common functionalities like transfers and balances. An ERC token contract with a specific supply is relatively easy for any programmer to deploy. The browser Solidity IDE Remix is a great way to get started and compile your first Solidity code. Here’s one sample fragment from an ERC-20 smart contract:
In contrast, ERC-721 is a standard requested for non-fungible tokens like collectibles. For decentralized games, these non-fungible tokens can represent tradable items where the uniqueness of each item is important. For ERC-721 tokens, the code looks slightly different. Instead of transferring a certain amount of tokens, the transfer function moves a token based upon a unique token identifier. It’s important to remember that since the Ethereum Project itself is not a corporation (but instead an open source project), these token requests are proposals made by community members and sometimes there is room for improvement. For example, ERC-20 smart contracts could have benefitted from a fallback function that prevents token smart contracts from burning Ether or tokens sent to them. Updates like this are being proposed for newer token standards. Although extremely promising, decentralization still requires an attentive and involved community dedicated to making continuous improvements.
So, what would a basic crowdlending smart contract look like for your business? For crowdlending, you could use a token standard like ERC-20 to get started. You’d need to write and sign additional contracts (which could also be executed on the blockchain) legally obligating you to distribute some amount of profits from your business to token holders. Legal agreements are often signed nowadays by hand, but there’s no reason they couldn’t provide a more secure digital signature recorded on a blockchain.
Benefits For Entrepreneurs
We recently released an article on the ELIX blog about how blockchain will democratize fundraising for entrepreneurs and investors. Opening equity crowdfunding via blockchain to investors globally should allow entrepreneurs to get much more competitive rates when creating a business. Moreover, it’s a great way to gauge interest and build a community of people vying for your business to succeed. Instead of relying on only a few investors in your network and the deals they offer, you can grow your brand and business presence even before your first product is launched.
The regulations around STOs, or Security Token Offerings, are complex and vary from country to country. These offerings are sometimes more complicated than the distribution of utility tokens. Be sure to have an experienced legal team to help you navigate the local laws in your jurisdiction when doing an STO. This is article is not financial advice, and you should always do your own research. Since blockchain is a new frontier, hiring lawyers that specialize in the space will help you make sure all legal counsel is relevant to your specific goal.
Profit Sharing Via Smart Contracts
Smart contracts would be an excellent way to distribute profits from a company. The rules for distribution (the entitlement of the shareholders to dividends) would be clearly stated in the contract code. As long as each business posted profits in a contract in the form of digital security tokens, the rules for how many each investor could receive would be completely transparent. Even the “Class” or specific privileges of each tier of tokenized stock could be recorded on the blockchain for further clarity. Board voting and major company decisions would also be transparent and publicly visible. Surprisingly, this might require some blockchain lawyers to learn basic smart contract coding.
That’s all for this post! If you’re interested in reading more articles about blockchain, crowdfunding and technology trends, check out the ELIX blog.