Smart Contracts: The age of Self Executing Agreements
Introduction
For as long as humanity has existed, there has always been disagreements. Whether over land boundaries, family entanglements, or even business dealings. The beautiful part in all of this is that we’ve also been able to come to agreements from deep-rooted disagreements and strife.
Coming to agreements no matter how hard or easy the process, has always been the easy part. Recording, sustaining, and enforcing the agreement for long periods of time has always proven to be the Achilles heel. This has led us to develop many frameworks till we arrived at the legal framework of contracts in ancient Rome.
A contract is a binding agreement between two or more parties and is usually enforceable by law.
The development of contracts marked an important point in our history as it allowed several kinds of agreements to be possible and today, contracts form the backbone of modern business and trade across the globe.
Interpret, Execute and Enforce
In most cases, the parties to a contract understand their responsibilities and stick to the terms of the contract. However, every once in a while, we have situations where one or more parties try to misinterpret a contract or shy away from their responsibilities as stated in the contract. In situations like this, the other parties will have to seek out ways to enforce the contract. This may lead to long tedious process of litigations, involving lots of third parties and spanning a long time. As a result, you have lots of businesses locked in legal battles for many years which in many cases means that the time duration for the execution of the contract has elapsed, before the end of the litigation.
This means that a good contract is one that is not open to misinterpretation and is both executable and enforceable.
The spirit of Automation and Equity
In the last 5 years, there’s been an unprecedented push for automation use cases for both business and individual (consumer) applications. To be fair, automation has existed for a while in the manufacturing industry and the recent push has been more for software autonomy and independence. However, recent innovations in finance and the rascality of governments have seen an increased push for the decentralization of finance and redistribution of financial technology.
Centralization and Central Control
The critical role of finance in any society had led to central governments and central control of financial instruments. However, even in the face of digital technology, time and time again, central governments and central financial systems for all their advantages are controlled by people who usually end up usurping financial powers for selfish reasons and interests and bastardizing the financial instrument making them practically useless for the populace. One only needs to look at Zimbabwe and the Zimbabwe dollar, to understand the damage centralization can do to a people’s finance. Of course, this is not only limited to third-world countries. There have been lots of reports of money printing, especially in the face of the COVID-19 pandemic. The effect may not be as dramatic as that of Zimbabwe and many other incidents, but, rising inflation has seen the money of millions of hard-working citizens lose value through no fault of theirs.
Decentralization and Super Powered Contracts
In mathematics, there is a method of solving simultaneous equations that is referred to as the elimination by substitution method. In this method, the elimination of the variable can be performed by substituting the value of another variable in an equation.
The inherent drawbacks of centralization in finance have accelerated the push for decentralization of finance, and the removal of the human third party, using the elimination by substitution method. Here, the central authority is replaced by an automated system or software that implements a contract, and its operation will not change when executed. In addition, every transaction would be recorded in a ledger following an agreement algorithm, and the ledger will be publicly distributed, available, and vetted to ensure equity. Since the automated system is not subject to human biases, this system of finance became extremely desirable.
The push for decentralization and trustlessness culminated in the development of various distributed ledger technologies which are mostly known as Blockchains, agreement algorithms, or consensus algorithms as they are known today and super-powered contracts, aptly called smart contracts.
A smart contract is a computer protocol or protocol that enables the verification, control, and execution of an agreement between multiple parties, digitally. Smart contracts are digital contracts that are self-verifying and self-executing.
Smart contracts run on the blockchain and do not require middlemen for executing the transactions. Transactions are only executed when the conditions in the contract are met.
How smart contracts work
Let’s imagine that Chris wants to buy Babz’s car on hire purchase. This agreement is formed on the Binance Smart Chain (BSC) using a smart contract. This smart contract contains an agreement between Chris and Babz.
In the simplest terms, the agreement will look like this: “WHEN Chris pays Babz 10 BNB, every FRIDAY from JANUARY 5, 2022, THEN Chris will receive ownership title of the car on DECEMBER 12TH, 2023”.
Once this smart contract agreement has been deployed, it cannot be changed — meaning Chris can happily and safely start paying Babz for the car every Friday.
Now, without using a smart contract in this scenario, Chris and Babz would have to pay lots of fees to third-party companies. Including the bank, a lawyer, and an agent.
The smart contract eliminates wait times and makes the transaction cost-effective.
Smart contracts are automatically executed once the conditions of the agreement are met. This means there is no need for a third party, like a bank, an agent, or the government.
Advantages of Smart Contracts
Smart contracts have the following advantages,
- Autonomy:
Smart contracts do not need brokers or other intermediaries to confirm the agreement; thus, eliminating the risk of manipulation by third parties. - Transparency:
The terms and conditions of smart contracts are fully visible and accessible to all concerned parties. There is no way to dispute them once the contract is established. - Security:
Smart contracts use strong data encryption algorithms, making them amongst the most secure items on the internet. - Trust:
The transparent, autonomous, and secure nature of smart contracts removes any possibility of manipulation, bias, or error. This generates absolute trust from relevant parties. - Efficiency:
The automated nature of smart contracts makes them inherently very efficient. - Cost-Effective:
Smart contracts in a system are reproduced on-demand and eliminate the need for a vast chain of middlemen, making it very cheap.
Disadvantages of Smart Contracts
Smart contracts have the following disadvantages,
- Inflexibility:
Smart contract processes are almost impossible to change. Any errors in the code can be time-consuming and expensive to correct. - Vagueness:
Real-life contracts include terms that are not always understood. This is a limitation as smart contracts are not always able to handle terms and conditions that are vague.
Application of Smart Contracts
Smart contracts can be used in a variety of fields involving both financial and non-financial data. Some examples are as follows:
- Payroll Management:
Organizations and businesses can benefit massively from using smart contracts to run their payroll. The contract can be set up with multiple parameters, allowing bona fide staff to be paid accurately and on time. - Property Management:
The real-estate sector is relatively less organized and has a high dependence on intermediaries. Property owners can utilize smart contracts to register and sell their properties in a transparent and immutable way while saving on transactional costs. - Crowdfunding:
Innovators can raise funds for their applications and projects using ICO (Initial Coin Offering) which is powered by smart contracts. - Intellectual Property Protection:
Using NFTs (Non-Fungible Tokens) which are blockchain-based and use smart contracts, authors, artists, and inventors can upload and register their work with time stamps on a public ledger to create irrefutable proof of ownership. - Elections and Voting:
Applications like FollowMyVote use smart contracts to protect votes from fraud. Each vote is written to the blockchain where it cannot be changed. At the end of all voting, the smart contract sends a token to an address that represents the winner of the vote.
Smart Contracts and Centralized systems
So far, you will notice that every use case for smart contracts are in blockchain environments. This is because, no matter how beautiful and effective smart contracts are, they cannot work effectively in environments where control is centralized and unautomated. It works best in situations where changes to data are almost impossible and where end-to-end control is not in the hand of a single user or group of users. The immutability of the contract and transactional data is a very important characteristic of smart contracts.
Smart Contracts, Lawyers and the Future
There have been conversations about the future of lawyers in a post-smart-contract world. Some persons have even gone ahead to suggest that smart contracts will replace lawyers.
Although smart contracts are self-executing in nature, they can’t replace lawyers however, the role of lawyers will change definitely as lawyers move from the accuracy of technical details to operational strategies, the evaluation of the feasibility of multiple solutions, and negotiation. Lawyers will also be needed to convert legal requirements to technical requirements, while also providing some level of quality assurance testing to ensure that technical implementations meet legal and business requirements.
Conclusion
Smart contracts are very powerful and have strong use-cases in our day-to-day lives. Its application in finance (Defi) was only inevitable considering the disadvantages of our current financial system. The technical requirements for implementing complex agreements are the only challenge to its continued adoption. However, with the advancement in technology, adoption challenges such as this will be inevitably surmounted.
