What if you could bind lawyers, banks, wills and contracts all into one single entity; removing the need to individually locate and pay these all intermediaries, and thus creating an all round more efficient process? That’s 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 work in practice. One of the major reasons for this was that there was no native financial system that was digital and could support the programming of transactions. After all, the entire purpose of having a smart contract is defeated if a bank is still required to authorize the transfer / release of money.
The biggest hurdle to this technology remained the fact that triggering payments and transactions within the financial system through computer programs was not yet possible. However, with cryptocurrency, or more specifically Bitcoin, we are closer to having true 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 payment_ 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 a small fraction of a 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, the best known implementation of smart contracts is Ethereum, which has an ecosystem built mainly around programmable smart contracts. Ethereum smart contracts have been the driving force behind at least three major trends within cryptocurrency over the years. Firstly, there was the DAO (Decentralized Autonomous Organization) concept, which employs cryptocurrency smart contracts to approximate the governance structure of a traditional corporation. Next, the ICO (Initial Coin Offering) funding mechanism, which allowed hundreds if not thousands of startups to be crowdfunded and ultimately led to a market mania. Finally and currently, the DeFi (Decentralized Finance) wave, which employs smart contracts to replicate traditional financial servies in a peer-to-peer fashion.
It’s important to note that Ethereum has seen the most use for cryptocurrency smart contract applications because it’s the original and largest cryptocurrency specialized for that exact purpose. However, smart contracts can and are run on practically every other cryptocurrency. Bitcoin, which is purposefully designed to be limited in its programmability so as to minimize unanticipated risk, nevertheless employs basic smart contracts as a matter of course for certain standard functions, such as multisig contracts or time-locked transactions. There are also other cryptocurrencies besides Ethereum which specialize in flexible smart contract creation and execution, such as Cardano.
It is amazing to think about how smart contracts could help us accomplish many exciting new things, like gaining 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.