What are Smart Contracts?

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What are Smart Contracts?

“Smart contract” is one of the key buzzwords of the day, right up there with the likes of “decentralization”, “blockchain”, and more. However, what are smart contracts?

Quite simply, smart contracts are contracts that run without human intervention.

Instead of having someone like the state enforce a contract (do what we agreed upon or I can sue you), a smart contract is a contract made of computer code with a set of agreed upon conditions, that when met, results in the contract executing automatically. Thus, there is no need for someone to enforce the contract.


Example of a Smart Contract

Though smart contracts have a large number of potential uses that are more or less limited by the imagination, here is one simple example of a smart contract.
Let’s say that Bob owns an apartment and is renting it to Sally.
Instead of relying on someone like a property manager to collect the rent from Sally, Bob creates a smart contract for rent payments.
The smart contract says that if Sally pays the rent by sending digital currency to the smart contract by the 1st day of each month, the digital passcode to the apartment will stay the same, allowing Sally to come and go as she pleases.
However, if Sally does not pay the rent by the 1st of the month, the smart contract will automatically change the passcode to the apartment, effectively locking Sally out of the apartment (until she pays the rent).
You can see how this type of automated agreement or smart contract could be more efficient! Bob merely has to setup the smart contract once and never has to worry about chasing after Sally for a rent payment because if Sally doesn’t pay the rent, he and Sally both know that she won’t be able to access the apartment. No law enforcement, lawyers, etc. needed.

Shortcomings of Smart Contracts

As with any new technology, there are shortcomings with Smart Contracts, too.

For example, smart contracts are not really “smart” (for now). They cannot adapt to situations like humans and instead, can only react to the fulfillment or non-fulfillment of the conditions that were agreed upon and coded during the initial creation of the contract.

For instance, let’s say that a smart contract is created with the condition that if John delivers a website to Paul, the smart contract releases blockchain assets to John. What if Paul wants a website with certain features and this isn’t specified in the smart contract? Or what if there is a disagreement about the quality of the delivered website and there is no process for disagreements specified in the contract?

If the parties involved in a smart contract fail to think of and code certain possible outcomes into the smart contract, the smart contract cannot decide in those cases. 

Also, the legality of blockchain and cryptocurrency is unaccepted or undecided in many countries, which means that smart contracts are not necessarily valid legal proofs in those countries.



The Future of Smart Contracts

Though interest in smart contracts has taken off in the past few years, smart contracts were first mentioned in a paper by American computer scientist, cryptographer, and legal scholar Nick Szabo in 1994

It wasn’t until 2014, in the Ethereum whitepaper, where Ethereum co-founder Vitalik Buterin proposed creating smart contracts with blockchain technology, that smart contracts went from being just an idea to a reality.

Today, the Ethereum blockchain and other similar blockchain platforms like Ethereum Classic (ETC), EOS (EOS), Tron (TRX), and others host many different smart contracts with varying use cases.

However, the technology is still in its infancy, and businesses, governments, and individuals are all exploring different ways to use it.

One of the more popular uses for smart contracts is issuing digital tokens like ERC20 tokens, but experts foresee uses as varied as improving transportation, supply chain logistics, cloud computing, freelancing platforms, investing, governance, and much much more.

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