A smart contract is a simple and quick way to perform transactions using a blockchain technology. For the first time, the term smart contract was used by Nick Szabo in 1994 in the USA, and the first practical implementations became possible in 2009, with the appearance of the first crypto currency.
A smart contract consists of three components: signatories, the subject of the contract and terms. Signatories are parties of the transaction; terms in the smart contract are the precise mathematical description of the contract clauses execution logic, which can be programmed.
It was the subject of the contract that caused difficulties in implementing the technology, for the reason it must exist within the environment in which the contract operates and be processed without human help. With the advent of crypto currency, this issue has been solvable. Technically, a smart contract resembles the function “if … then … else …” This function allows the computer algorithm monitor the parties’ compliance with the conditions and performs the actions described in the subject matter of the contract.
Why is everybody talking about smart contracts?
Traditional contracts are quite difficult to draw up and the involvement of the third parties is necessary. Today for conclusion of the contract both parties should turn to a specialist to draw up the text of the contract. Apart from contract drafters and signatory parties there is one more necessary party — the guarantor of the contract execution. Nowadays such a regulator is a state, which guarantees the currency of transaction and its legal framework within which disagreements will be resolved.
The authorities should also intervene in settlement of all the possible disputes, as well as a great deal of financial bodies should also be involved, so as the parties to the contract would be able to perform financial transactions.
As we can see, for operating a traditional contract it is necessary to involve many mediators, which still can not guarantee a thorough execution of all the terms of the contract. Since crypto economy is based on elimination of mediators, increase in popularity of cryptocurrency leads to the increase in popularity of smart contracts.
The combination of blockchain technologies, which guarantee protection from falsification of data, cryptocurrency, which is independent from any authority, and computer programs which are presented as smart contracts, enables not only to imagine, but also to implement in practice secure and simple mechanisms of conclusion of deals.
The Practical Application
In the future smart contracts are going to make major changes in the stock market: by the time the stock exchanges will stop playing the key role and we will get the opportunity to get rid of it by making operations on sale and purchase directly without lawyers, brokers and other mediators.
Individual politicians in Russia, Ukraine, Australia and also some representatives of the European Parliament have serious intentions to use smart contracts during the elections. Nowadays the voter turnout in many countries leaves much to be desired because of the red tape. Queues, the need to fill many papers, doubts in the transparency of the process and many other things discourage people from voting. It is likely that soon we will be able to vote for a candidate without placing a ballot into a box but by launching a smart contract.
One more obvious field of using smart contracts is insurance. It takes companies weeks or even months to consider insurance cases and make decisions about payments to customers because of the bureaucracy and administrative difficulties. The time when the payments will be deposited in the client’s account before he or she claims about the insurance case is not too far.
In the meantime the Barclays Corporate Bank has already introduced using smart contracts for redirecting payments when the ownership is changed in the register.
Strengths and Weaknesses
Despite all the advantages of this technology, there are still several shortcomings that should be taken into consideration. There is growing concern that together with eliminating bureaucracy, smart contracts can hit administrative employees, just as automatization once hit industrial employees.
As far as a digital state is still a dream, a state in its usual meaning strives to get an ultimate control over everything. That’s why the control on the part of the Government might preclude execution of smart contracts.
However, the advantages of smart contracts are so obvious that the development and widespread implementation of smart contracts will certainly gain ground over time. The technology based on blockchain guarantees reliability and security, savings on mediators, independence from the third-party specialists, and promptness of the contract performance by both parties to the contract.
Usually there are lots of mediators between producers and purchasers such as shops, logistics services and so on. Smart contracts can be described as a vending machine in the world of contracts. This metaphor emphasizes the principal advantage of smart contracts over its traditional alternatives.
According to Vitalik Buterin, the founder of Ethereum, the pioneering field to implement smart contracts is going to be financial sector. Today it takes about several weeks to sell an apartment, whereas with the implementation of smart contracts the time can be reduced to just 3 minutes.