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. The only question is, 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 threaten to replace existing Escrow services, notaries, and even the involvement of human legal teams in property transactions and financial disputes.

At present, legal and financial agreements are overseen by human lawyers and Escrow service providers. When purchasing the likes of property, a contract is prepared to outline the terms of a sale.

Traditional contract steps image info graphicLawyers, realtors, and Escrow services, then only release property titles to property buyers and funds to sellers, when the terms of an agreement have been satisfied.

In every case, the involvement of lawyers, realtors, and Escrow agents, incurs fees which are paid by both parties in a transaction. Smart contracts change this. Specifically, by coding terms of an agreement into an executable application hosted on a secure platform like the Ethereum blockchain.

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How do Smart Contracts Work

Smart contracts effectively operate as autonomous agents overseeing complex transactions.

To demonstrate, if person A expects to receive an entry code to a vault after sending an agreed sum of money to person B, 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 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.

To learn more about Smart Contracts and how blockchain technology makes this all possible, click here

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