What is a Smart Contract?

Diana Furman ethereum

More people have started picking up the idea that blockchain has the power to change the world, or at least the possibility to make our lives easier. A few days ago we talked about Ethereum’s controversy and mentioned smart contracts linked to this blockchain. In our opinion, it is a spectacular example of how technology can contribute not only to the world’s economy, but also to the life of every single individual.

A smart contract is a prewritten code built within a blockchain (Ethereum is the most famous one, but there are indeed others) that allows certain targets to get executed when a specified goal is reached. Very similar to a regular contract with a digital cherry on top.

Background

Despite the fact that people usually associate smart contracts with Ethereum, it was not Vitalik Buterin who initially projected them. Back in 1994, cryptographer Nick Szabo proposed the idea of “computerized transaction protocol that executes the terms of a contract” and coined the term, “smart contract”. Technological development at that time wasn’t able to bring Szabo’s idea to life. It was only after Bitcoin introduced blockchain technology to the world that smart contracts got their base for development. Finally in 2013, the Ethereum project created conditions to carry smart contracts into execution.

Smart Contracts in the Real World

For example, if Alice rents a house, according to her rental contract, she must pay a security deposit fee and a monthly fee to the owner. In the case she fails to pay the rent before the specific date, she has to deal with the aftermath and the landlord himself. However, the contract cannot guarantee that everything will go smoothly.

Unless it’s a smart contract.

When a smart contract is involved, the landlord doesn’t even have to come and collect the rent, let alone check his bank account for receipts because the rent is already withdrawn automatically. And Alice takes her payment obligations seriously because she has a digital identity with social credibility (basically, a credit record) that she needs to look after.

Let’s say, Alice gets tired of renting and decides to buy a house. What does she do? She looks for a house, puts in a bid, pays a deposit fee, receives an ownership document, goes to a lawyer to check if the document is legit and, finally, goes to a bank to get a mortgage, hoping for the best.

Now let’s see how Alice can improve her living conditions in a blockchain-powered reality.

To buy a house she goes to a blockchain property network where she finds a perfect house, that has been uploaded to the network with all the necessary papers (including the proof of ownership), and pays all the due fees in cryptocurrency. In the case she has a friend who wants to share this purchase, there is also a possibility to make a smart contract for multiple buyers on certain conditions. And in the future, when her friend decides to sell their part, they can do that by simply signing a transaction.

Pros and Cons

Smart contracts have plenty of advantages because of the very core of blockchain technology.

SCs are Immutable

Once the contract has been created, it cannot be changed anymore. You can rest assured that no double-dealer will ever interfere with it.

SCs are Distributive

The output of the contract is validated by everyone on the network, so a single person cannot force the contract to perform any operation without the approval of the other community members. As a result, the smart contract becomes tamper-proof.

SCs are Safe

Your personal information is all encrypted.

SCs are Fast and Cheap

The beauty of coding is that it makes business processes automatic and eliminates the middleman. As a result, you save time and money.

Smart contracts can be implemented in a whole variety of professional fields, such as trading, insurance, research, voting, product development, healthcare… the list of possibilities is endless.

Yet there’s still a lot of work to be done. It is unclear how the whole process can be regulated on the government level, or how to even tax it. Moreover, smart contracts will need to take into consideration too many scenarios and it’s not always easy to predict all of them. In fact, it’s pretty hard. Another major issue is that linking “the digital to a physical asset” is almost impossible without the involvement of a third party as the author of this post points out.

To sum it up — smart contracts technology is full of promise, however, it is still in its infancy. Reaching an agreement with governments and defining a trustworthy third-party are the top priorities.

Lumi is a great supporter of smart contracts technology as well as dapps powered by them. For instance, Lumi SDK is an awesome solution for a dapp to avoid dealing with the process of signing transactions. We’ll do the job ourselves. If you want to know more, feel free to drop us a line on Telegram public chat and if that’s not enough then follow us on Twitter, Facebook, and Reddit to get even more useful info and news of the industry.