Contracts are an inseparable part of our lives. However, traditional contracts can be a real pain in the neck, since you need to pay a lawyer or notary to prepare it, and in case the contract is not honored, you need additional services to protect your rights. On the other hand, smart contracts can save you money, time and a lot of trouble. Let’s see how.
What Is a Smart Contract
A smart contract is a piece of code (in a programming language) that specifies the terms and conditions of a transaction through a set of IF, THEN, AND, OR and other types of programming commands. The code runs on blockchain that serves as a transparent, public ledger.
Imagine applying smart contracts to exchanges, buying, and selling of goods, even to elections and voting. This would mean that no human interaction is required, and no one can change anything within the process. There is no room for “interpretation,” no room for human-tampering.
Advantages of Smart Contracts
Smart contracts have properties that bring many advantages to the users not available before:
- Immutable: Smart contracts are unchangeable; they cannot be altered in any way. Nobody can change any part of a smart contract without stirring the attention of the others within the network. Not even the person who created the smart contract has the power to change it.
- Trustless: A smart contract cannot be changed, so there is no need to “trust” anybody. Trusting or not trusting the other party of the contract doesn’t come into play at all. Furthermore, there’s no room for interpretation.
- Autonomous: A smart contract functions like a direct agreement between the parties, one which needs no intermediary or facilitator, because the output is produced from the input deterministically (with nothing random).
- Safe: Smart contracts are protected by complex cryptography, which makes them safe, extremely difficult to hack, and definitely way more difficult to change than any current contract.
- Exact: Smart contracts share their current state (e.g. paid, not paid; published, not published, etc.) across the blockchain, or the entire network. Thanks to this, each node on the blockchain carries an exact copy of the same state of the smart contract.
- Effective: Intermediaries, such as lawyers, notaries, estate agents, advisors, facilitators, and many others, are not needed at all. This brings in high effectiveness, saving you a lot of time and money on fees and processing time needed for all kinds of documents.
Examples of Smart Contracts
Let’s have some examples of smart contracts and how these can be used. All the examples are from real use-cases, but simplified to make it easily understandable.
Smart Contracts With Crowdfunding
In case you need funding for your interesting project, you can go to a crowdfunding platform and ask the users to contribute to your case. The crowdfunding platform will keep some amount of this money for itself to pay for their servers, for converting between all kinds of currencies, and other services. And if the target amount will not have been collected, all those who have sent their money have an issue to deal with.
Smart contracts make everything much easier: People will pay their contributions, e.g. in Ether, a globally accepted currency which will be stored in the contract itself, so you don’t even need to have a bank account. The exact balance is always available online. Once the balance reaches a certain fundraising level, the money is automatically paid out to the person who intends to create the product. If the amount doesn’t reach that level, then all the money is automatically sent back to the people that paid into the contract. Another advantage is that you save all the service fees that would have to be paid out to the old centralized version of the crowdfunding platform. (Many current platforms take 10%, which could be $100,000 in case the goal was to collect $1,000,000). Thus, 100% of the collected money really goes to the ultimate product.
Smart Contracts With Insurance
Here’s an example from travel insurance. You can try to protect yourself, e.g. against trip cancellation, interruption, delay, missed connection, etc. Claiming damages on these policies is often a lot of hassle since you are required to prove the delays, your losses, and other things.
Smart contracts solve all of this with a clearly stipulated algorithm: A flight is canceled, meaning you have to take another flight, and you will be automatically and immediately reimbursed exactly according to your policy. Once your flight is delayed for e.g. 12 hours, you will get paid automatically. No discussions or phone calls to your insurance company are needed. You don’t have to send any documents, any proof. The smart contract and your claim procedure is executed automatically.
Smart Contracts With Goods, Wages and Dividends
The examples of smooth automatic contractual payments through smart contracts are endless. Here are just a few.
When you order from an eShop, you pay in advance in full, trusting that the goods will be delivered to your door. Instead, you can pay to a smart contract which serves as an escrow account. Once the eShop verifies the amount, they send you the package. The smart contract can be programmed to release your money to the shop once the package is marked as delivered for which a GPS tag or your electronic signature can be used. In case you don’t receive the goods within a certain time frame, you get your money back.
In a similar way, the smart contract can execute other automatic payments, including wages, commissions, and dividends. The wages within a sales team can be programmed, for example, according to the performance of the workers or according to any conditions suitable for your business.
Smart Contracts With Music and Art
Thanks to smart contracts, music audio, video and similar media can be offered in a decentralized way: For a small fee to the distributed (decentralized) network, the artist can offer his work with no intermediary. As a music fan, you will send some amount to a smart contract which will keep track of what you’ve listened to (or downloaded) and from which artist. This way, the artist gets paid directly, with no intermediary (who usually takes a huge percentage from the profit to himself) which might lead to much lower prices for the end user and considerably bigger profits for the musician, benefiting both the music fans and the artist, and excluding all intermediaries who bring no value into the process.
Smart Contracts With Voting
Even in democratic countries, people voice concerns about the transparency during elections and other procedures where voting is used. This is even more apparent in countries where democracy is just a far cry from what is instated. The voters are often not sure to what extent the resulting votes were tampered with.
With smart contracts, this system would be absolutely transparent and immutable. With elections taking place through the blockchain, all the information would be stored within the smart contract, with no way to alter it. All kinds of voting systems could be used. For example, you can have one plus vote for your chosen candidate and one minus vote you send to the candidate you don’t want. Your plus vote will be added to the balance of your chosen candidate, your minus vote will be deducted from the balance of the other candidate. Many other methods can be applied, including all kinds of ethical incentives for the voters. Since everything runs on the blockchain, no manual tasks and no office workers are needed to process the data, saving time and costs, and avoiding errors, and possible manipulation.
A similar approach can make things easier for shareholders or people voting in any other setting. Hopefully, it is clear how much better and effective the voting system with smart contracts could be.
Smart Contracts With Social Networks
The current social networks, social sharing platforms, and many blogging sites sit on servers that belong to a company or individuals who can decide what will or won’t be published. They can delete the posts, edit and censor them, or they can close or ban the comments to your post, etc.
The whole social network can be run in a distributed way, meaning that the entire platform is shared through millions of user computers through smart contracts. Then nobody, not even the person who created the smart contract can change it any more. Of course, people will have to learn that transparency and freedom is an extremely valuable commodity, so they will be willing to pay a small fee for such immutable information. In the same way, people can get paid for the post that brings in some value. You will send some amount to an “escrow account” in a smart contract. And whenever you click “like” to some post, a small amount will be deducted from your account and sent to the author of that post. After some time, people will be more than inclined to pay for quality information that will save them time and give them proper guidance. Smart contracts can make this perfectly possible; we just need to wait and see how viable this approach will be.
Can Smart Contracts Change the World?
Hopefully, the examples show some possibilities of smart contracts. The world is on the brink of monumental progress, since the potential for smart contracts to change the world is immense. Many things and processes can run faster and cheaper. Many errors because of manual processing and human factors can be a thing of the past. Since smart contracts can be layered and combined to create complex systems, they can be the proper means to advance from a centralized to a decentralized way of doing things. The technology is ready. It remains to be seen if people are ready too.