Smart Contracts are one of the most discussed ideas to emerge from the spike in popularity of DeFi. Yet, few people truly grasp what they are and what they potentially imply for us. I want to explain what smart contracts are and what the technology can achieve in this blog.
The concept was invented in 1994 by computer scientist Nick Szabo in his article, ‘Smart Contracts: Building Blocks for Digital Markets.’ Yes, it was 27 years ago. Smart contracts were defined by Szabo in 1996 as “a collection of promises, stated in digital form, including protocols within which the parties deliver on these promises.” While the technology available to enable smart contracts has grown much since then, smart contracts accomplish essentially the same thing. Let’s look at what that term entails in practice.
The importance of contracts in today's systems
According to contract law, a contract is a promise or performance delivered in exchange for another promise or performance. It involves circumstances such as “I will give you 10,000 rupees if you provide the mobile phone I want to my house,” or “I will deliver the mobile phone you want to your house if you give me 10,000 rupees.” The first is a promise in return for an act, and the second is an act in exchange for a promise.
These kinds of transactions may be seen all across our present systems. You have a contract if you pay rent. It is a contract if you have an internet connection at home. Almost every transaction in which we participate is the same. They serve as a record of both parties’ commitment to aid in preventing conflicts and mitigating dangers. They are a cornerstone of our civilization as we know it today. These agreements allow us to work together to achieve all of humanity’s great accomplishments.
Contracts can be written or spoken; nonetheless, they are only significant if they can be enforced or prevented from being broken. Our legal systems provide this function through all of the protections we put in place in the event of a contract violation. A classical contract, in that meaning, is between three parties: the promisor, the promisee, and the state.
These methods, however, are not without their drawbacks. Cost, time, enforcement, openness, and conflict of interest are just a few of the areas where there is room for improvement.
How can smart contracts alter our perception of these agreements?
Smart contracts employ programming and computer code to implement the agreement automatically when the specified circumstances are satisfied, eliminating the need for human participation. Usually, when completing deals involving several stakeholders, a third party (such as a lawyer) would be required to review and verify all of the material, making the process difficult and time-consuming. Smart contracts make it easier by eliminating the need for a third party and automating the process, allowing stakeholders to interact directly with one another. This significantly increases the cost and time efficiency of our present systems.
In some contracts, the promisee and the promisor conflict with interest. In the case of insurance, the interests of a for-profit insurance firm are fundamentally opposed to those of the insured. The corporation has every incentive not to follow through on the contract. The insured must trust the company to keep its commitment. Once the pre-determined criteria are satisfied, smart contracts automate the process of following through. Smart contracts are transparent and public since they are created on a blockchain and cannot be changed once deployed.
People in certain nations with highly developed legal systems almost take contract enforcement for granted. However, the ground reality in other developing countries is somewhat different. Legal systems are overworked, underfunded, and generally weaker. In other circumstances, such as health insurance, the time it takes to pursue legal action might be deadly. Smart contracts have the potential to automate much of the excessive labor of the legal system while still adhering to the rules of the nation, saving a significant amount of strain and guaranteeing that many more people can receive justice.
Other uses for smart contracts
Future smart contract application cases are only limited by our creativity, from creating a common enforcement framework for Kenyan trading with a Canadian to automating fundamental everyday transactions and agreements. A vending machine is the most often used example of a smart contract system that is currently in use. It automates the purchasing process by removing the need for an intermediary, such as a shopkeeper. Other ways smart contracts might improve our systems using the existing technology are as follows:
- Banking and financial services – Trust is essential in traditional banking and financial services. The industry is littered with middlemen whose interests may not necessarily coincide with clients’. There are other instances, but the rapid popularity of decentralized finance, or DeFi, demonstrates that people desire trustless financial services.
- Digital identity – Misuse and theft are grave concerns in today’s increasingly digitized world. Firms such as Google, Facebook, and Amazon hold enormous amounts of data on their consumers. They must trust the companies not to misuse. However, leaks and hacks continue to occur, such as the recent large data leak from Facebook that affected over 500 million users. Smart contracts would allow consumers to own and govern their personal data while also reducing liability for organizations that must protect vast amounts of data.
- Supply chain management — In today’s globalized world, most businesses have extraordinarily complex, multi-party supply networks. Companies also find it challenging to maintain their supply chains proprietary due to many partners involved. One of the most anticipated use cases is the use of smart contracts to streamline supply chains and Internet of Things devices to provide more visibility and security for supply chains.
- Healthcare — Improved data exchange among healthcare professionals means a better likelihood of correct diagnoses, more effective treatments, and an overall rise in healthcare organizations’ capacity to offer cost-efficient care. Smart contracts enable multiple players in the healthcare value chain to share network access without jeopardizing data security and integrity by allowing them to trace data provenance and any modifications made.
It is not every day that new technology emerges with the potential to transform not just one or two sectors but the whole way we conduct business in our society. Only time will tell whether the promise is realized, but in the meanwhile, we should keep up with the latest advancements.