What are smart contracts?

Now that we have the ability to set up a database of information that has been validated and secured by a community of hosts, what can we do with it?

The first application was to create Bitcoin as a form of currency that isn’t controlled by a company or country and is available to everyone, which may in fact be the most superior form of money ever created. The Bitcoin blockchain only contains transactions of Bitcoin – that’s it, and it does it so well that it presents a viable alternative to Fiat currency currently used by countries around the world.

As a side note, the term Fiat is a Latin word that means ‘determination by authority’ and in the case of currency, it is declared legal tender by a government despite it not being backed by a tangible asset.

So, if the Bitcoin blockchain only focuses on transactions in Bitcoin, what are others doing with the blockchain technology? Enter Ethereum, a second-generation blockchain, based on a White Paper by Vitalik Buterin and founded by Buterin, Gavin Wood, Charles Hoskinson, Anthony Di Iorio and Joseph Lubin in 2014. The Ethereum blockchain was the first to include “smart contracts” into the blocks, building on the approach used to create the Bitcoin blockchain. Since 2014 there have been many more blockchains released, some that do amazing things, some that do very little, and some that are just straight-up scams – which is unfortunately typical in the early stages of any new wave of innovation.

A fast follower after Ethereum was the Cardano blockchain, which was founded by Charles Hoskinson and Gavin Wood, who left the Ethereum development team due to irreconcilable differences. Cardano is a third-generation blockchain that was founded in 2015 with the intention of harnessing the power of blockchain for the benefit of all humanity, and to be the most environmentally sustainable blockchain platform.

In this article, we will explore one of the key types of functionalities available in modern blockchains, that of “smart contracts”, and provide an overview of how they can be used in the business sector.

Without going into the deep technical stuff, a “smart contract” is basically a digital version of a contract or agreement that lives inside a blockchain, and can access information from other blockchains and off-chain databases. This digital functionality means that the contract itself can verify and enforce its own terms if specific conditions are deemed to have been met. Once a smart contract is agreed upon by the parties and deployed into a blockchain, then it is not able to be changed, which can be good and bad. It’s good because it means it is secure, but also if you want to change something in the original agreement, you cannot; any updates would need to be part of a subsequent agreement.

Smart contracts are typically used for agreements in the form of “If or when this thing happens then do this… if not then do this…”. The standard IF/OR statement structure is a core part of computer coding. These types of statements can be cleverly bundled together to not only create digital contracts that take action themselves according to the agreed rules, but can also be used to create decentralised applications that run inside blockchains, as we will explore later this week.

Elements of smart contracts include the following:

• Transactions: As part of the code for a smart contract, there can be a number of transactions that are triggered when conditions are met. Once the transaction is complete, it is recorded in the blockchain as an unchangeable record. This might include paying an invoice when a parcel arrives and is scanned into the blockchain at its destination rather than needing to issue an invoice, or automatically renewing a vehicle’s registration and insurance when it is due (after reviewing all the options and selecting the best deal based on the user preferences), or buying a ticket to your favourite singer’s next concert as soon as they become available, along with booking your favourite table at the nearby restaurant as part of your pre-concert ritual.
• Tracking: Smart contracts can be used to track items along the supply chain to make sure that specific conditions are met, such as temperature control for medications, vaccines, food, and other temperature-sensitive items. This can be done by, for example, having a trucking company agree as part of the contract to stream data from the truck’s refrigeration equipment directly to the blockchain. If the ‘cold-chain’ is broken, it cannot be hidden and action is taken immediately according to the agreement in the smart contract.
• Intellectual Property: Smart contracts can be used to verify and enforce IP based on information stored in various blockchains and off-chain databases. The smart contract would contain details of ownership, royalties, use conditions, fees and acknowledgement requirements that are associated with specific forms of IP. If a breach of the conditions is identified, immediate action is automatically taken as per the agreement.
• Negotiation: Smart contracts can even be used to negotiate on behalf of the parties to the agreement. For instance, a set of requirements can be agreed upon and coded into the smart contract that will then search the digital world for a provider that can meet these requirements. The smart contract may even be authorised to enter into an agreement with this provider (or even another smart contract), and monitor the delivery of the product or service, triggering immediate responses according to the terms of the contract.
• Escrow: Smart contracts can be used to hold funds, data, IP or any other digital assets in escrow subject to terms agreed between the parties. For instance, profits and IP from an investment project could be put directly into a blockchain and subjected to a smart contract that lays out the terms to which the funds can be accessed and the ownership of the IP. This might include the distribution of the profits to investors, stakeholders and suppliers as per the agreed percentages in the smart contract.