Smart contracts are essentially software applications that run and operate automatically.
A central authority or “trust” of other parties is not necessary for the exchange of information and execution.
As to the fact that it is software, it cannot be clever, or ‘smart’, except that it runs automatically. There are programming languages that are well written and those that are badly written.
Also read : Do we see an end to unregulated exchanges in Crypto?
Using smart contracts, how do they work?.
Suppose we both bet $50 on the weather in Paris tomorrow. You predict sunshine, I predict rain. As of today, we are able to manage this transaction in three ways:
- We can trust each other. Rainy or sunny, the loser will give €50 to the winner. Especially if we’re friends, this would be a good method for managing it. Even so, someone can easily not pay another, whether they are friends or strangers.
- The bet can be turned into a contract. If both parties have a contract in place, they are more likely to pay. The winner will, however, have to pay additional money to cover legal expenses, and the court case may take a long time if either party does not pay. This seems like an inefficient way to handle a small amount of cash, especially for small amounts.
- We can involve a neutral third party. Each of us gives €50 to a third party, who will give the total amount to the winner. However, she does also have the option of running off with our money. This leaves us with either the trust or the contract option.
Neither trust nor contract is an optimal solution: We can’t always trust strangers, and enforcing a contract requires time and money.
Blockchain technology is interesting because it offers us a fourth option which is secure, quick, and cheap ie smart contracts
Blockchains allow us to write a few lines of code, a program or ‘smart contracts’ to which both of us send €50. This program will keep the €100 safe and check tomorrow’s weather automatically on several data sources. Sunny or rainy, it will automatically transfer the whole amount to the winner. Each party can check the contract logic, and once it’s running on the blockchain it can’t be changed or stopped.
This may be too much effort to develop smart contracts for a €50 bet, but imagine selling a house or a company or the numerous other use cases (finances, information, contractual obligations, legal ownership etc), where this will be useful, and as it becomes more prevalent, totally essential. Just like the internet itself.