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Chainlink is a protocol that allows us to use trustworthy data to automate transactions.

related topics: Tokenization

Understanding Smart Contracts[edit | edit source]

A smart contract is a new way to use software to manage agreements and to help each party to an agreement ensure that they get what they bargained for.

Management by Neutral Algorithm[edit | edit source]

The crucial innovation of a smart contract, is that some or all of the performance of a contract is managed by a software agent that both parties can trust, specifically one that is

  1. indepedent, meaning its outside of the control of either party; and
  2. transparent, meaning that each side can verify that the agent performed, and will perform, as programmed.

Theoretically, we could imagine several ways this might be implemented. For example, we could imagine the software agent being managed by

  1. A corporate intermediary (comparable to an escrow company) see The Future of the Sharing Economy
  2. a sufficiently powerful artificial intelligence

But the first widespread use of a neutral, impartial algorithm is by decentralized network, aka a blockchain. This is a different type of automation. We've been using "automation" i.e. an automatic payment from your bank account, for decades. What is different about this automation is that neither party to the contract controls the automation. Instead it is controled by a decentralized network:

What makes these programmable money contracts “smart” is not that they’re automated; we already have that when our bank follows our programmed instructions to autopay our credit card bill every month. It’s that the computers executing the contract are monitored by a decentralized blockchain network. That assures all signatories to a smart contract that it will be carried out fairly. Casey & Vigna 2018-04-09

And this in turn means that, if each party trusts the decentralized network, they can engage in a transaction, even if they don't trust each other:

With this technology, the computers of a shipper and an exporter, for example, could automate a transfer of ownership of goods once the decentralized software they both use sends a signal that a digital-currency payment—or a cryptographically unbreakable commitment to pay—has been made. Neither party necessarily trusts the other, but they can nonetheless carry out that automatic transfer without relying on a third party. In this way, smart contracts take automation to a new level—enabling a much more open, global set of relationships. Casey & Vigna 2018-04-09