In this three-part series on the disruptive technologies that are emerging in the current digital revolution, I saved what I believe to be the most transformative until last. Digitally created smart contracts are poised to catapult blockchain technology, discussed in the previous blog post, to an even higher utility beyond financial recordkeeping.
In essence, smart contracts will replace the need for intermediaries in creating and executing contracts, making the process faster, more efficient, more secure, more transparent, and less costly. In other words, say goodbye to mortgage brokers, real estate agents, and any other type of third-party intermediary typically involved in overseeing contracts between two parties. Think about what that could mean. The possibilities in the entire realm of the free market would be endless.
What Exactly are Smart Contracts?
First, it’s important to understand what this technology is and how it works. Smart contracts are not contracts per se, at least not in the legal sense. They are actually tiny pieces of software that attach to a blockchain. Since it can only exist on top of a blockchain, it possesses the same attributes of blockchain technology—once created, it’s immutable, transparent, and secure.
Smart contracts consist of coded algorithms that execute a set of rules agreed to by each party running the blockchain. Contracts or agreements are verified and trusted in the same way bitcoin or other financial transactions are. They are executed across a vast computer ecosystem that uses consensus protocols to confirm an agreed-upon sequence of actions specified in the contract’s code. Parties to the agreement can trust that the terms will be executed automatically, with no third-party involvement, and with little chance of failure. The information is then stored in the blockchain forever.
What Does That Mean to Me?
If you think about contracts in the legal sense, they are truly the backbone of our entire system of verification and enforcement of an agreement between two or more parties. Then you think about all that goes into that, with the enormous amount of time, energy, and resources spent on the facilitation, verification, execution, and enforcement of contracts—it’s virtually incalculable. With the self-realizing capability of smart contracts, most of that will go away.
Now consider your typical involvement in the contracting process. It almost invariably requires your personal and, often, your financial information to be collected by different organizations and used by them at different times. With smart contracts, the information is centralized in one place. And because any change in your data is immediately updated at the blockchain, you can be assured it is always accurate and easily accessible. That can be especially life-changing in organizations that need to identify individuals involved with a particular contract.
Can We Trust Smart Contracts?
Smart contracts are also self-enforcing, which is the most critical aspect of contractual agreements. Every step of the contract’s execution is detailed in the algorithm is set to be executed automatically. However, the next step can only be performed if all the contract conditions up to that point have been met. It can’t move forward without the approval of all the parties.
In terms of payments, since smart contracts are attached to blockchain, and blockchain is home to the movement of cryptocurrencies, the agreement can call for funds to be held in escrow as cryptocurrency. As part of the automated execution of the contract, the release of any funds is tied to all conditions being met.
In essence, smart contracts eliminate the need to trust.
What’s the Potential for Smart Contracts?
When I start to think about the potential use of smart contracts, my mind reels. Its application across a wide range of domains is infinite. Think of bank lending, insurance companies handling claims, medical recordkeeping, mortgage land title recording, supply chain logistics—it goes on and on.
Without the need for any intermediaries in any of those cases, automatic execution of the process, and centralized storage of information, there will be more transparency, less fraud, faster, secure, and more accurate processing, all at a lower cost. There will be no more having to go through multiple parties or organizations to retrieve information for insurance claims, medical history, title claims, or where a package is.
The internet and digital technology have sped up the flow of information. It has also led to the digitization of assets, such as cryptocurrency. Blockchain technology will bring trust, privacy, integrity, and transparency to our interactions with businesses. But it will be the widespread adoption of smart contracts that will enable us to live our lives literally at digital speed.
