Smart contracts are powered by blockchain, the technology behind cryptocurrencies. The most famous of these, Bitcoin, was the first to develop its own smart contracts. These were, however, quite limited. Then along came Ethereum, conceived by Vitalik Buterin specifically to support smart contracts. And we’re very grateful to him for that – here are 5 reasons why you should be too:
Every step of smart contract transactions takes place on a public and decentralised ledger. This means all parties can check and trace the data involved. If any of the actors wishes to confirm that everything is as it should be, they can do so with the click of a mouse. Not so with traditional contracts, with physical documents to request and review. Paper contracts can also fall victim to tampering after parties have agreed on terms. Figures can be changed, conditions altered, etc.
The peer consensus system, one of blockchain’s great safeguards against foul play, makes hacking or tampering with smart contracts practically impossible. Smart contracts mean peace of mind for every actor
2. Do business with whoever you want, however you want
Traditional business dealings require a lot of resources to be assigned to issues of trust. Smart contracts can act as a trusted third party without the costs associated with a middleman. Parties agree on the conditions to write into lines of code.
Language, by its very nature, gives rise to grey areas. It’s open to interpretation, may be distorted when translated, etc. Code, on the other hand, can be read only one way. So, smart contracts guarantee a set of extremely specific outcomes for all parties. Whether partners or direct competition in the real world, everyone can do business. With no middlemen and no need for litigation.
And the three pillars from point 1 fill in the gaps, fostering trust between parties.
3. A future without paper
Going 100% digital is a goal for most businesses. There are the obvious benefits to the environment, a factor growing more urgent every day. But, achieving a paper-free way of doing business has a host of other advantages. A staggering amount of resources are wasted each year because of the inefficiencies of paper contracts.
These can include:
documents that get delayed or lost altogether in transit,
human errors from filling out thousands of similar or identical documents,
the dangers of having more than one valid document about an agreement in circulation.
Even when paper-based processes run as planned, documents can still take days or even weeks to arrive at their destination. This drains resources and the documents usually need to be stored somewhere.
Smart contracts are instant, 100% digital and stored forever on the blockchain. This frees up resources that you can direct elsewhere to the benefit of your business.
4. Self-executing: leave it to the code
Another pillar of smart contracts is that they are self-executing. Written into their code is an irreversible “if this happens, do this” protocol. This could be as simple as paying a sum in escrow to one actor, or refunding it to the other. But one contract could also be the trigger which sets another in motion. This ability to interact with others allows for the creation of more complex apps, known as Dapps (decentralized apps). And the possibilities are endless.
Here are some everyday examples that have been used to describe the concept:
The vending machine
The simplest analogy for a smart contract. The machine has the conditions of the transaction written into its “code”. We insert our cash, trusting the machine to self-execute and give us a delicious candy bar. This example can also work as an example of how one smart contract can trigger another. A few more lines of code and if ours is the last candy bar, the vending machine can automatically send out for more.
The pizza house
Imagine a pizza place that has a refund offer if a pizza arrives late. If a certain time limit is reached, the money is refunded to me, the customer. If it gets to my house on time, the pizza place gets my money and I get my delicious pizza. Everyone’s happy.
The apartment
Instead of sitting down with landlord and lawyer to draw up a rental agreement, I create a smart contract. It contains all the security requirements to start the rental. The “if – then” clauses could cover and automate every step. From provision of documentation, to paying a deposit, it’s all in the code. I can even have the keys delivered to the address of my choice.
So, now we understand how they work in theory, this brings us to point five, our favourite:
5. What they can do for us:
What is truly exciting about smart contracts are the revolutionary applications they have. Big changes are already happening in a wide range of sectors. Here’s a dose of inspiration:
Government
Voting systems powered by blockchain would be corruption free (see point 1). Also, having a system that’s 100% online could get our tech-savvy youth to participate in democracy in far greater numbers;
Health
Healthcare is a sector plagued by fraud. This situation could be greatly improved by the security blockchain offers. Personal health records could be secured to the blockchain with a private key that only allows access to those that should have it;
Music and film
Revenue in these industries is managed through complicated, often ambiguous creative rights contracts. With smart contracts, these could be publicly accessible. This could make the way royalties get shared out a lot more transparent, equitable and, in short, fair.
