The Smart Contracts2
A smart contract is a computer code running on top of a blockchain containing a set of rules under which the parties to that smart contract agree to interact with each other. If and when the pre-defined rules are met, the agreement is automatically enforced. The smart contract code facilitates, verifies, and enforces the negotiation or performance of an agreement or transaction. It is the simplest form of decentralized automation.
The term smart contract is a bit unfortunate since a smart contract is neither smart nor are they to be confused with a legal contract.
- A smart contract can only be as smart as the people coding taking into account all available information at the time of coding.
- While smart contracts have the potential to become legal contracts if certain conditions are met, they should not be confused with legal contracts accepted by courts and or law enforcement. However, we will probably see a fusion of legal contracts and smart contracts emerge over the next few years as the technology becomes more mature and widespread and legal standards are adopted.
Smart contracts radically reduce transaction costs. Auto enforceable code – whether on the protocol level or on the application level – standardizes transaction rules, thus reducing the transaction costs of:
- reaching an agreement
A smart contract can formalize the relationships between people, institutions and the assets they own. The transaction rulesets (agreement) of the smart contract define the conditions – rights and obligations – to which the parties of a protocol or smart contract consent. It is often predefined, and agreement is reached by simple opt-in actions. This transaction rule set is formalized in digital form, in machine-readable code (formalization). These rights and obligations established in the smart contract can now be automatically executed by a computer or a network of computers as soon as the parties have come to an agreement and met the conditions of the agreement (enforcement).
The concept of a smart contract is not new. However, Blockchain seems to be the catalyst for smart contract implementation. The most primitive form of a smart contract is a vending machine. The rules of a transaction are programmed into a machine. You select a product by pressing a number related to that product, insert the coins, the machine acts as a smart contract checking wether you inserted enough money, If yes, the machine is programmed to eject the product, and if you inserted too much money, it will also eject the change. If you didn’t insert enough money, or if the machine ran out of the money, you will get your change back. Automatic vending machines not only slashed transaction costs by making human vendors obsolete, but they also expanded service, offering 24/7 availability instead of limited opening hours of a kiosk.
Characteristics of a smart contract
Smart contracts are capable of tracking performance in real time and can bring tremendous cost savings. Compliance and controlling happen on the fly. In order to get external information, a smart contract needs information oracles , which feed the smart contract with external information.
Smart contracts are : - Self-verifying - Self-executing - Tamper resistant
Smart Contracts can :
- Turn legal obligations into automated processes
- Guarantee a greater degree of security
- Reduce reliance on trusted intermediaries
- Lower transaction costs