So, we know Blockchain smart contracts can do revolutionary things to combat fraud. But as with any technology, Blockchain has chinks in its armour. It’s vital to know where those weaknesses lie to combat them. Here, we’re going to look at:
Reasons people are using smart contracts to put the trust back into transactions.
Why this has certain limitations.
Ways to reinforce these weak links and unleash the true potential of smart contracts.
Smart Contracts vs Fraud
In certain areas of human interaction, fraud is rife – and comes at a huge cost. Losses in the health care industry to fraud are somewhere in the region of $68 billion annually. In foreign aid efforts, well-intentioned donations often end up in the hands of corrupt or violent groups.
How can blockchain restore some order to this unfortunate situation?
By bringing its three fundamental pillars into play: transparency, traceability and immutability.
Smart contracts restore trust to interactions by being “trustless”. We know; this seems like a contradiction in terms. Simply put, parties write conditions of their agreement into a smart contract’s lines of code. The contracts then self-execute on an “if this happens, do this” basis. As a result, human interpretation plays no further part. Removing trust from the equation means anyone can do business with anyone.
Wow, We’ve Found a Silver Bullet for Fraud!
Well, yes and no; fraud can happen anywhere humans are involved. It’s true; a smart contract’s conditions are nigh-on impossible to tamper with. Their conditions become irreversible once wheels have been set in motion. But, there is still a human factor to take into account: someone has to write the code or enter the data in the first place.
Smart contracts are not infallible; just look at Initial Coin Offerings (ICOs). When legitimate conditions are written into a smart contract, blockchain is incorruptible. But, what if it contains incorrect or fraudulent information? In this case, the technology serves only to blindly enforce the flawed code.
Blockchain solutions’ weak point, then, is when human beings are involved: the point of entry. Unless we can be sure who is entering the data, we risk being tied to a fraudulent and irreversible contract.
So, What Can We Do?
There’s a conflict here:
One one hand, the open-source, open-to-everyone philosophy that drives blockchain and makes it so special.
On the other, the need to regulate the human aspects of working with the technology.
And if we have to create institutions to keep track of interactions, we risk compromising decentralisation.
For many, the answer lies with solutions that already exist. For example, KYC (“Know Your Customer”) solutions ID actors in a given transaction. They can also cross-check against AML (Anti-Money Laundering) blacklists. If applicable, the physical entity (bank, advertising agency, etc.) may also be verified.
Adding a layer of security at the point of entry is vital to safely negotiate the point-of-entry step. At eTrustable, our aim is to get to the “trustless” stage with as little risk to our clients as possible.
We use market-leading third-party solutions for KYC and facial recognition
We let our clients decide what documentation will identify each person, entity or organisation in a given transaction.
Once that level of security has been achieved, then, and only then, can our immutable smart contracts be created and secured on the blockchain.
Wherever there is human involvement, all systems are vulnerable. This might be due to anything from innocent coding errors to intentional scams. Blockchain’s transparent, “amend-only” ledger takes out a swathe of problems related to trust. If providers of smart contract solutions can give clients the means to cover the point of entry, we can make “trustless” transactions a reality.
