What are Smart Contracts?

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What are Smart Contracts?

In March 2018, Rachel Paris, a Partner at top New Zealand law firm Bell Gully, gave a Masterclass presentation on how smart contracts could soon influence jurisdictional issues in New Zealand.

Touted as a form of technology which might one day replace lawyers, Rachel’s lecture was a timely one. But, what are smart contracts, and how do they disrupt existing legal and financial institutions?

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Smart Contracts Explained

Smart contracts are exactly what their name implies. Namely, smart (meaning automated/intelligent) contracts, which can replace human intervention in agreements such as property transactions and financial trades.

At present, legal and financial agreements are overseen by humans, such as lawyers and escrow service providers. When purchasing the likes of property, a contract is prepared to outline the terms of a sale. Lawyers, realtors, and escrow services, each have a part to play in the transaction and will only release property titles to property buyers and funds to sellers, when all the terms of an agreement have been satisfied.

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The involvement of all these agencies incurs fees which have to be paid by the parties to the contract. Smart contracts change this. Specifically, by coding terms of an agreement into an executable application hosted on a secure platform like the Ethereum blockchain, which means that the contract execution is not reliant on human intervention.

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How do Smart Contracts Work

Smart contracts effectively operate as autonomous agents overseeing complex transactions.

For example, say that person A is going to send some funds to person B, and in exchange receive an entry code to a vault. A smart contract can be created which stores this code securely. The smart contract will only then release the code to person A, when person B receives payment.

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While the above scenario is a simplified one, smart contracts can currently be created which are capable of autonomously overseeing real-world real estate transactions, insurance claims, and complex contractual agreements between businesses and individuals.

Smart contracts can also already be used to:

  • Manage the safe storage of patient medical records
  • Verify the digital identity of individuals across different systems and networks
  • Automate derivatives trading on financial markets
  • Track physical goods through supply chain processes
  • Automatically manage complex wholesaler and supplier relationships

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What are the Benefits of Smart Contracts?

Wherever smart contracts are used, they help parties involved in transactions reduce costs and expedite transaction settlement, without the need of third parties such as lawyers, escrow agents, or notaries. More importantly, smart contracts remove the possibility for human error when settling complicated transactions.

If the terms of a contractual agreement are not fully met, there is no possibility that communication errors or lack of due diligence will result in a smart contract executing by mistake. This, therefore, makes smart contracts arguably more secure than traditional contractual processes managed by real people.

 

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The Future of Smart Contracts

In late 2018, UK bank Barclays forecast that smart contracts could boost the efficiency of interbank derivatives trading by 25%. 2019 is also already witnessing the development of new AI equipped smart contracts, which have the potential to revolutionize modern stock market trading. This being the case, the near future will likely see smart contracts become commonplace in a variety of familiar real-world contexts.

Want to learn more? Click through to read about how Ethereum facilitates Smart Contracts and how blockchain technology makes this all possible.
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