Page 21 - FIGI: Security Aspects of Distributed Ledger Technologies

kept offline. There are also online wallets, which, in out only if certain conditions are met. Smart con-
the current state of the industry, are mostly third par- tracts are – and must be - executed independently
ty crypto exchanges also acting as ‘custodian’ of the by (user) every node on a chain.
keys so as to ensure that any token can be quickly Smart contracts are tied to the blockchain-driven
made liquid so as to be traded. Crypto-exchanges transaction itself. For example, in the Ethereum block-
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are however vulnerable and have been hacked. If the chain, its Solidity programming language allows the
exchange is offline, no tokens can be accessed. 88 use of natural language ‘notes’ in an EtherScript that
A newer and ostensibly more secure system uses helps improve human readability in smart contracts.
what are called secure multiparty computation These notes are analogous to the wording in a sep-
(MPC) to secure wallets. This means that multiple arate (physical) legal contract. The physical contract
non-trusting computers can each conduct computa- signature is replaced by the use of cryptographic
tion on their own unique fragments of a larger data keys that indicate assent by participant nodes to
set to collectively produce a desired common out- the ‘legal’ terms embedded in the blockchain by the
come without any one node knowing the details of EtherScript. 94
the others’ fragments. 89 Potential benefits of smart contracts include low
This is combined with what is known as ‘threshold contracting, enforcement, and compliance costs.
cryptography’ for the computation function across They consequently make it economically viable to
multiple distributed key shares to generate a private form contracts for numerous low-value transactions.
key signature This allows multiple parties acting Smart contracts then could be successfully applied
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as multiple transaction approvers to each provide in e-commerce, where they can significantly facil-
their secret share of a private key to MPC algorithms itate trade by reducing counterparty risk and the
running locally on their devices to generate a sig- costs of transacting by minimizing the human fac-
nature. When the minimum number of pre-defined tor in the process. In a practical use case example,
approvers provide their shares, a signature is gen- where a contract between the parties to purchase a
erated without ever creating an entire key or ever property asset is written into a blockchain and a set
recombining shares into a whole key on any device, triggering event, such as a lowering of interest rates
at any time. There is thus no single vulnerable com- to a certain level is reached, the contract will execute
puter where a key can be compromised. In all, this itself according to the coded terms and without any
functionality is referred to as ‘Threshold Signatures human intervention. This could in turn trigger pay-
using MPC.’ One of the first iterations of this wallet is ment between parties and the purchase and regis-
KZen’s ZenGo wallet. 91 tration of a property in the new owner’s name. Fig-
There are also web apps to manage a user’s ure 3 shows the use of a smart contract that provides
account client-side, given your key (or data required insurance for crop failure whereby small farmers in
to recover it, such as a seed or passphrase), secrets developing countries are automatically paid out if
are not known to the back-end. Hybrid systems fea- automated sensors – as oracles to a agri-specific
ture the key encrypted on the client-side, but stored DLT– detect insufficient rainfall.
encrypted in a cloud are used to login to the platform. The smart contract may also make the need for
escrow redundant. The legal impact is established
5�4 Smart Contracts through the smart contract execution, without addi-
As noted above, some DLT implementations such tional intervention. This methodology contrasts with
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as Ethereum have built-in intelligence, setting (busi- the conventional, centralized ID database in which
ness logic) rules about a transaction as part of what rules are set at the entire database level, or in the
is called a ‘smart contract. The smart contract can application, but not in the transaction.
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execute in minutes. In another example, national IDs could be placed
Smart contracts are contracts whose terms are on a specific blockchain, and the identifiable person
recorded in blockchain code and which can be auto- could embed (smart contract) rules into their unique
matically executed. The instructions embedded with- ID entry, allowing only specific entities to access their
in blocks - such as ‘if’ this ‘then’ do that ‘else’ do this ID for specific purposes and for a certain time. The
- allow transactions or other actions to be carried person can, through the blockchain, monitor this use.

Security Aspects of Distributed Ledger Technologies 19