What Is A Smart Contract?

February 28, 2019  |  By

What is a Smart Contract? And how is it different from what I already get at VW?

A smart contract is simply a piece of code that is executed on the blockchain network. It may or may not be a legal contract. As most code does, it runs off an “if/then” statement. Blockchain allows this code to run on a distributed system, across thousands of computers participating in the network, thus in a completely autonomous, tamper-resistant way.

In 1997, Nick Szabo first formally conceptualized the idea that many traditional contract clauses can be embedded into hardware and software (enter, blockchain in 2009).

Example: I have a bet with George over the UT/Georgia football game. Traditionally, George and I may execute a legal contract, and when UT wins, I (or my attorney) may need to track George down to get paid.

A smart contract enables this traditional contract to be self-executing. George and I execute a smart contract, of which we each put in 1 bitcoin. The contract, written in code, generally states:

  1. To accept and hold 1 bitcoin from Lacey and George, each. (Note: the contract acts as the escrow agent here.)
  2. To monitor NCAA.com (our trusted third-party oracle) coverage of the UT/Georgia game on January 1, 2019.
  3. When the time hits 00:00, record the score of the game.
  4. If UT’s score is greater than Georgia’s score, then release 2 bitcoins to Lacey.
  5. If Georgia’s score is greater than UT’s score, then release 2 bitcoins to George.

Versus a traditional document, this smart legal contract documents our agreement and it self-executes by distributing the funds. So we’ve saved the awkwardness and hassle of me having to bother George to pay up. As a bonus, the contract and calculation are stored on an immutable ledger, so I, and my attorney, accountant or a judge can verify my receipt of the bitcoin with absolute certainty.

Another example: If I am buying your house, I do not know you and therefore I do not have reason to trust you. The same goes for you, for me. Neither of us knows if the other will show up to closing day with the applicable goods to transfer. Thus, we pay an escrow agent and multiple other parties to provide trust in our transaction. However, with smart contracts, you can apply the above logic to a simple home purchase – upon receiving cash payment and the title to the home, the contract exchanges ownership.

Smart Contracts are the darling of blockchain right now. If you’ve done any research, the possibilities of blockchain are “endless.” Some of the most popular use cases are supply chain management (track that mango from seed to shelf!), holding assets like securities and land through a digital means (yes!), and voting on the blockchain (no!).

But, we also see this great unknown of possibilities, where a self-executing contract can create new revenue models and entities, like a decentralized autonomous organization.

Quick sidechain: If we have blockchain, do we even need digital assets? YES! Remember, in order for our network to truly be decentralized and run autonomously, those holding the ledger must have an incentive to maintain it truthfully. What is their incentive? Cold hard digital asset cash.

Posted in: Blockchain

About the Author(s)

Lacey Shrum

Lacey is an attorney at Vela Wood where she serves businesses that use blockchain technology and digital assets. She serves as a subject matter expert and expert witness to attorneys and advisors as they encounter digital assets in their traditional legal practice.

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