Smart Contracts 101

 
Much of the ICO bubble of 2017 revolved around the sudden rise of Ethereum. Almost overnight, this second generation blockchain burst onto the scene promising the world “smart contracts”. Well, what exactly is a “smart contract” and how are they being used?

In this rebroadcast compilation> of two episodes from CRYPTO 101, Matthew Aaron discusses the ins and outs of smart contracts for the everyday consumer, before interviewing Amy Wan, CEO and Founder of ‘Bootstrap Legal’ to help get a better grip on what they are.

What is a Smart Contract?

A ‘smart contract’ is a codified version of a traditional contract. A traditional contract typically involves two parties (though there can be more) who agree on certain terms that revolve around an ‘offer’ an ‘acceptance’ and a ‘consideration’. There is an offer made by one party, which is accepted by a another, about an exchange of consideration (asset, product, service).

A smart contract takes a traditional contract and puts it into computer code. This means that the conditions for executing the contract are reduced to digital input and output — reducing the contract to a mathematical operation: if ‘x’ occurs then deliver ‘y’. 

In the context of blockchain technology, the smart contract is distributed across multiple nodes in the network, meaning the execution of the contract can be carried out by anonymous parties without the intermediation of a third party. Additionally, the network is then responsible for validating the execution of the contract and including it in the immutable ledger.
 

What can they do? 

With the right code, smart contracts can do whatever traditional contracts can do. Currently they are being used by protocols like Ethereum and projects that are building on top of the Ethereum blockchain to settle transactions and implement various utilities.

At the moment the most common use for smart contracts is their implementation in decentralised exchanges. When you buy or sell cryptocurrencies on a decentralised exchange, there is no third party verifying and securing your purchase. Instead, a smart contract executes depending on the variables (price and amount) you specify.

What are the positives?

As mentioned above, smart contracts do away with third party intermediaries. Conditions for the execution of a contract can be written into code that negates the need for any one else to serve as an arbiter between two parties. Due to their mathematical nature and their implementation on a blockchain they are immutable, meaning there is no room for subjective disagreement.

What are some negatives?

Again, because of their mathematical nature, smart contracts aren’t very ‘smart’. Sometimes we need a degree of human subjectivity to understand the ‘spirit’ of an agreement and work around the harsh mathematical requirements some contracts want to enforce. 

Additionally, they require a human coder to be created in the first place. Meaning, the parties entering into a smart contract with each other are still in some sense dependant on a third party, namely, the coder who produced the code behind the smart contract. This is a problem that will become less significant over time, as smart contracts become more battle-tested. But at the same time, the ability to read and write code will be what separates those who can manipulate and understand contracts between parties and those who cannot.

Conclusion

While there is still relatively low implementation of smart contracts currently in the public sphere, there is no doubt they will continue to be implemented and begin to crop up in everyday transactions between people and things. Their efficiency shows great promise but the harshness of mathematical code in settling human business is a concern that will need to be thoughtfully addressed.


 

CRYPTO 101 1st Anniversary Episode: