What if you could bind lawyers, banks, wills and contracts all into one single entity; thus removing the need to individually located and pay these intermediaries, and make it all a more efficient process. That is exactly what ‘Smart Contracts’ are all about. It is a technology that is set to change how contracts are made, modified, handled and executed.
What are smart contracts?
Smart Contracts have been around since 1994- yes, they are that old. To explain simply, smart contracts work like a computer program, using if-then-else statements. The only change is that they are doing so using real-world assets and conditions. When any programmed event or condition is triggered, the clause corresponding to it will be executed automatically.
Smart Contracts have been here since 1994, but the theories of their founder, Nick Szabo, remained unclear as to how they would function and work. One of the major reasons for this was that there was no native financial system that was digital and could support programming of transactions. The entire purpose of having a smart contract is defeated if a bank is still required to authorize the transfer/release of money, isn’t it?
The biggest hurdle to this technology remained the fact that triggering payments and transactions within the financial system through computer programs was not possible. However, with cryptocurrency, or more specifically Bitcoin, we are closer to having smart contracts as time passes by. With Bitcoin itself being nothing more than a program, the whole idea of making computer programs to trigger any payments is now becoming possible.
Understanding the automation of simple transactions
Think of it like this - you are trying to place a bet on the Super Bowl game of around $500 (which is approximately one Bitcoin) on the Patriots. On the other hand, your friend is betting the same amount but on the opposite outcome. The first step of this process will be for both of you to put your Bitcoins in a neutral account being controlled by the contract. When the game is over, and the contract has verified through trusted sources that the Patriots won, it will automatically deposit your winnings and bets from your friend to you.
So what is happening currently in the world of smart contracts?
At present, two open-source projects are working on this technology of smart contracts, and both have made quite a lot of progress this year! These include Etherum and Codius. Codius, developed by Ripple Labs, has its own digital currency by the name of Ripple. Codius, on the other hand, is trying to be of use between different types of cryptocurrency, Bitcoin and Ripple, for instance.
With Codius, interaction with other ledgers as well as web services will be made possible. It will also work on Bitcoin and other systems. Etherum, on the contrary, is a new currency and smart contracts are more likely to mold into the entire payment system.
It is amazing to think how smart contracts could help us accomplish many things, like the freedom from banks and lawyers. Right now, some of the best brains in the world are working on it; and while we may not know who will win this race in the end, the end-user is sure to benefit from it all.