What are ‘smart contracts’ and their applications, in simple words?
You may have heard of ‘smart contracts’, those so-called ‘intelligent’ contracts that run themselves on the blockchain! But what are they really? What are they used for?
For a reminder on ‘what is blockchain, in a few words?’ Click here.
What are ‘smart contracts’?
A smart contract is a software program stored on the blockchain that is capable of performing transactions automatically, according to preprogrammed rules. They are similar to normal contracts, the only difference is that they are completely digital!
Why are they revolutionary?
One of the major advantages of smart contracts is that they are 100% autonomous; in other words, once programmed, they are executed automatically according to the conditions defined in advance.
As a result, no intermediaries are involved in the execution of the contract, reducing costs and increasing efficiency.
Smart contracts also guarantee that the terms of the contract cannot be fraudulently altered. Since smart contracts are stored on the blockchain, they inherit its properties.
What makes smart contracts trustworthy?
Contracts programmed on the blockchain are immutable, meaning that no one can change what has been defined at the beginning without the other participants knowing.
Also, they are distributed transparently, so each participant confirms the validity and proper execution of the process. The contract cannot be hijacked to obtain funds, for example, because the other participants would reject the fraudulent transaction.
What are the concrete applications of smart contracts?
Let’s take the example of Kickstarter — the crowdfunding platform.
Kickstarter is a third party, which stands between the project creators and the project supporters.
Participants must therefore trust Kickstarter to manage the money sent and collected during crowdfunding.
If a project posted by a project owner has been fully funded on the platform, then Kickstarter must send the money to the project owner.
The project owner, therefore, expects to receive the money and the project supporters want the money to be sent to the project owner.
But if it has not been fully funded, then the participants expect to be reimbursed.
With ‘smart contracts’ a similar system can be created, where no intermediary / third party is needed. Indeed, the smart contract can be programmed to hold the funds received by donors.
If the conditions of the contract are met, i.e. the set amount is reached, then the smart contract will send the money directly to the project holders, autonomously.
And if the objectives are not reached, then the money goes directly back to the participants. As smart contracts are stored inside a blockchain, all information is distributed transparently among the participants. This also means that no one is in control of the money.
Another example is the insurer AXA, which uses ‘smart contracts’ in the context of travel insurance. The insurer has set up a service that will allow passengers to be automatically compensated when their flights are delayed, without having to apply to AXA.
This saves an incredible amount of time and money, both for passengers and for the insurer, which no longer needs to process claims.
The smart contract is triggered by automatically connecting to pre-defined airport databases.
One could also think of banks, for example, which could use smart contracts to issue loans, as long as the applicant meets the predefined conditions.
What are the obstacles to the adoption of smart contracts?
One of the main limitations is regulation.
Indeed, in order for companies to benefit from the efficiency and reliability of these smart contracts, the law must evolve to give legal value to this new technological tool.
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Research & Strategic Consulting firm specialising in Blockchain and Emerging Technologies.
Maloya 5D Lab assists businesses, governments, regulators and academia in gaining a better understanding of blockchain and emerging technologies and how they can be used to achieve sustainable innovation as well as create new resilient economies.
