The future of Bitcoin and Ethereum smart contracts

What Are Smart Contracts?

Smart contracts have the potential to replace notaries, lawyers, and bank intermediaries — or do they?

Dr. Derek Austin 🥳
Feb 21 · 6 min read

What is a smart contract on the blockchain?

A smart contract automatically enforces a contract between two parties, with a credible digital ledger, all without the need for third parties.

“A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract.” — Ameer Rosic on the Blockgeeks blog

Basically, code is injected into the blockchain, and it is automatically enforced without any need for user intervention or third-party verification.

For example, with Ethereum smart contracts, the code lives at an address on the Ethereum network and can receive, hold, and release funds.

Smart contracts are frequently considered cryptocurrencys “killer app” because they have the potential to replace traditional contracts.

What are smart contracts used for?

Smart contracts have enormous upside potential to be a disruptive industry affecting anyone involved in ledger verification, contracts, or sales.

A simple example of the use of a smart contract would be an Airbnb-esque rental agreement enforced by a digital lock.

You send the money to my smart contract, and it sends you the door code.

The smart contract holds the money in escrow, releasing it to me on the first day of your stay. If you cancel, the terms of the cancellation would be automatically enforced, and the door code would be deleted.

This is exactly how Airbnb works now, except a smart contract would eliminate the need for Airbnb to actually hold the funds in escrow.

Or, it could eliminate the middle man entirely — Airbnb’s 17% fees.

What is the future of smart contracts?

My hope is that the improved ease of transaction verification resulting from smart contracts will lower service fees worldwide.

I’d like to see a world where credit cards have less than a 1% merchant fee and Airbnb’s service fees for guests and hosts drop to, say, 10% or less of the stay.

Already, banks are using smart contracts internally to improve the efficiency of processing and clearing payments through automation.

More complex smart contract examples include real-time auditing and risk assessments by credit companies, merchant processors, and accountants.

There is even potential for lawyers to create “standardized smart contract templates, similar to […] LegalZoom” according to Ameer Rosic.

Which cryptocurrencies offer smart contracts?

To recap, a smart contract is just a way of having code enforce a financial transaction — the program releases funds based on certain criteria.

Many available cryptocurrencies, including Bitcoin, offer smart contracts.

Typical smart contracts might be rental agreements or asset sales, though smart contracts can also be used by artists to sell music directly to fans.

While the concept of smart contracts applies to any blockchain, in theory, the cryptocurrency Ethereum is most often associated with smart contracts.

That’s because Ethereum smart contracts are robust, versatile, and powerful thanks to the complex coding capabilities available using Solidity.

Will smart contracts replace lawyers?

Despite the hype, it is premature to say that blockchain smart contracts, particularly Ethereum smart contracts, will eliminate lawyers.

The fatal flaw is the idea of committing code to the blockchain itself — it is permanent, costly (in ETH), and the blockchain has to judge every single transaction of the smart contract, even if there are tons of transactions.

“[W]hat makes contracts so powerful is that a judge is not necessary for a transaction, but only as a backup in the event of a breach. Other ‘smart contract platforms’ such as Ethereum and Tron completely miss this fundamental insight of contracts.” — Conner Brown on his Medium blog

A solution is a tool that was first created to make microtransactions instantaneous and affordable in Bitcoin: the Lightning Network.

“The design of the lightning network fully grasps this contracts concept. With lightning, millions of transactions can take place between two individuals without needing the judge at all.” — Conner Brown on his Medium blog

The judge is the blockchain. And the judge doesn’t need to enforce every transaction, just those that may be in breach of contract.

The future is lightning

Using a lightweight tool like the Lightning Network instead of the sledgehammer of the entire blockchain makes sense.

“Imagine if every computer had to store every e-mail, to receive any. That’s how blockchains work. Lightning Network allows computers to make blockchain transactions, only storing the data they care about — their own money.” — Elizabeth Stark on the Coin Center blog

A smart contract system built on top of Bitcoin allows the judge (the blockchain ledger) to be invoked only when needed, not every time.

So the future may be Bitcoin smart contracts instead of Ethereum smart contracts — or more likely a lot of both in the 2020s and beyond.

There could even be an implementation of the Lightning Network on top of Ethereum, like there is for Decred, to achieve similar benefits — faster transactions and separating smart contracts from the blockchain itself.

Bitcoin smart contracts are here to stay

Realistically speaking, Bitcoin is the biggest criptomoneda around, by far, and there are many advantages to going with the big behemoth.

“[S]implicity is crucial for smart contracts by forming the basis of predictable execution. In this light, [B]itcoin’s simplicity and security shines through.” — Conner Brown on his Medium blog

The key factors for smart contracts are trust, reliability, and convenience — and Bitcoin’s massive gravity means Bitcoin smart contracts are inevitable.

Current solutions for Bitcoin smart contracts include the aforementioned side-chain RSK (Rootstock) as well as the Lightning Network.

Other smart contract options include Particl, Scriptless Scripts, Discreet Log Contracts (DLCs), and even ETH-wrapped BTC smart contracts.

It’s a good time to be writing a smart contract indeed.

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