Research & Insights

An Introduction to Blockchain-Enabled Smart Contracts

by | Aug 18, 2017 | Blockchain, Distributed Ledger, Smart Contracts

In 1996, cryptographer and computer scientist Nick Szabo coined the term “smart contract”, defining it as “a set of promises, specified in digital form, including protocols within which the parties perform on the other promises”. By doing so, he envisioned a future economy driven by these self-executing agreements, codified in code that would move capital and resources between individuals and businesses. Value would be exchanged in the form of digital currency and recorded on some sort of trustworthy ledger that couldn’t be tampered with. Capital would move across borders faster, markets would become more efficient, and consumers would participate in peer to peer transactions. Szabo’s vision was prescient, the only problem was that functional digital currency operating on a trustworthy ledger didn’t yet exist. The rest of the world needed 15 years to make the advances in cryptography, game theory, and computer science to catch up. For most, smart contracts were relegated to the “nice but unfeasible” category of things.

This changed when the first bitcoin was mined in 2009. Suddenly, the platform required to enforce smart contracts existed; and developers, thinkers and organisations at large could explore the possibilities smart contracts presented them. So, what is a “smart contract”, really?

At a basic level, a smart contract can be thought of as a vending machine. Once the vending machine is satisfied that I’ve put in a valid quarter, it will dispense me with a can of Cola. The cost of breaking into the machine is greater than the value of the soft drink and change you’d collect, so it’s not feasible to tamper with. Anyone can use the vending machine, and they can trust it to dispense cola providing they pay the right amount.

We can take this analogy and use it to generalize any agreement that relies on conditionality, verifiability and enforceability. Providing you satisfy the conditions that the smart contract’s code can verify, it will automatically enforce the agreement between parties. The can of Cola becomes any product or service you can imagine, the quarter you put in becomes any set of requirements you need to fulfill to get that good or service. It is worth noting here that these smart contracts are only enforceable on the blockchain in which they are embedded. They are not legally enforceable, and do not constitute legally binding contracts (at least at this stage).

So, what’s the low hanging fruit? Smart contracts present us with a plethora of use-cases, from streamlining supply chains, efficiently digitising title and registry databases, and even creating “smart property”. Let’s have a quick look at each of these use cases individually:

  • Supply chains: Smart contracts and blockchains allow items in a supply chain to be tracked, catalogued and verified as they cross borders with lower costs than existing systems. Item provenance can be verifiably proved, with each step of its journey from producer to consumer being publicly verifiable. This feature alone has immediate value in markets where provenance counts, such as wine, art and high-quality consumer goods where counterfeits are rife.

  • Land and title databases: Australia is in the process of transitioning to a digital registry for land and property titles. Even with this progress, conveyancing services for real estate transactions still cost thousands of dollars. Smart contracts will enable title and registry information to automatically be transferred as part of the exchange of funds when real estate changes hands, dramatically cutting down conveyancing costs.

  • Smart property: Embedding physical devices, such as Internet of Things (IoT) sensors and cars, with smart contracts opens the door to “smart property”. These embedded contracts would automatically give control or authority to parties once they have paid for the service. One could imagine a rental car of the future that grants access to a user as soon as they pay the rental fee, bypassing the current clunky payment infrastructure.

Whilst these potential use cases are cause for excitement, smart contracts, like any technology, are subject to limitations and misconceptions. As mentioned earlier, they are not legally enforceable, nor are they themselves artificial intelligence (they are event-driven code). They are unable to ensure confidentiality of information for the parties involved if the contract is on a public blockchain. I list these limitations not to detract from the variety of use-cases that are feasible, but to help you keep in mind that smart contracts are a technology with features and limitations like anything else. They will not “change everything”.

Tying this all up, smart contracts allow us to enforce conditional agreements on a blockchain between parties that do not need to trust one another. This will have implications that we cannot yet imagine when wider technological trends such as AI, IoT and quantum computing come into the mix and we here at DTI will continue to follow them with great interest.

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