First proposed by Nick Szabo in 1994 (yes, you read that right), Smart Contracts are a natural extension of blockchain’s decentralized nature and one of the technology’s main value propositions. Here to revolutionize the way we enter into agreements with others, Smart Contracts solve the perennial problem of contract execution and ensure that each contracting party receives its due.
Following the concept of decentralization, their drafting does not require the services of an intermediary in virtually any step along the way. Rather than being written on a piece of paper like their ‘normal’ counterpart, the contents of Smart Contracts are mutually agreed upon by the contracting parties, subsequently written into the code and exported onto a public ledger – a blockchain.
What makes Smart Contracts so unique and useful is the fact that they are fully automated. There is no need for a lawyer to draft them and once a trigger event occurs, the end result is distributed between the parties as agreed upon during their negotiations.
To put things into perspective, consider the following scenario:
Jack and Jill like to gamble. So much so that they have a tradition to regularly bet money on tomorrow’s weather. Typically, the loser always pays the winner. Except for the last time, there was a bit of a problem – Jack had bet on it raining, it turned out a sunny day and in the end, he refused to pay Jill.
Enraged by Jack’s fallacy, Jill decided to turn to their mutual friend John to settle the dispute. John, however, knew nothing of the arrangement and couldn’t help make things right. Jack and Jill’s contract here was anything but smart – they hadn’t put anything into writing and she was unable to get her hard-earned money from him. Had they made a Smart Contract the situation would have been a lot different.
If specified, the outcome of their Smart Contract would be dependent on the event of the weather being a certain way. Had it not rained, the contract would have automatically transferred the specified sum to Jill’s wallet account based on the available information.
This is, of course, a very simple situation. Smart Contracts are quite versatile and can be applied to a multitude of scenarios – from transfer of property to million-dollar deals and other high stakes environments that require execution on either side.