What are smart contracts?

Cryptocurrency has been a part of some people’s modern and digital lives since its release. With the birth and growing public attention of cryptocurrency also comes the inception of smart contracts. 

What are smart contracts? 

In the simplest of terms, smart contracts (also known as “smart properties” and ”chaincode”) are contracts in the form of a computer code. It is a computer protocol that digitally verifies and enforces the negotiation or performance of a contract, without third parties. 

They are self-executing agreement embedded in a computer code, which is managed by a blockchain. 

A blockchain is a growing list of records linked using cryptography. The most common types of blockchains are Bitcoin and Ethereum. 

Moreover, an excerpt from the book Token Economy: How Blockchains and Smart Contracts Revolutionize the Economy written by Shermin Voshmgir also defined the smart contract as “a self-enforcing piece of so ware that is managed by a P2P network of computers. Smart contracts are rights management tools that provide a coordination and enforcement framework for agreements between network participants, without the need of traditional legal contracts. 

They can be used to formalize simple agreements between two parties, the bylaws of an organization, or to create tokens.” 

The concept of smart contracts was first proposed in 1994 by American computer scientist, legal scholar, and cryptographer Nick Szabo. Relatedly, Szabo invented a virtual currency called “Bit Gold,” which combines different elements of cryptography (like timestamped blocks) and mining to achieve decentralization. 

Further, a smart contract is only as smart as the people coding it. 

How do smart contracts work? 

Smart contracts are programs that run within a blockchain, and they work a lot like vending machines. Ethereum programmer Vitalik Buterin explained that after an asset or currency is transferred into a program, “the program runs this code and at some point it automatically validates a condition and it automatically determines whether the asset should go to one person or back to the other person, or whether it should be immediately refunded to the person who sent it or some combination thereof.” 

When the required amount of cryptocurrency is dropped into the smart contract, then the escrow, ownership right, or whatever else drops into your account. 

Smart contracts mainly use the if-then method. For contracts regarding property buying and selling, the agreement, in its simplest term, would just say: If Team A pays Team B 300 Ethereum, then Team B will receive ownership of the house. 

Smart contract cannot be modified once put into place, and are also automatically executed once the conditions in the agreement are made. 

What does a smart contract look like? 

According to Monash University, smart contracts are simply lines of code. A smart contract that says a buyer named Fiona, who would purchase 100 shares of Tesla, Inc. from John at a defined price of $10 per share, would look like this in lines of code 

 It is also noted that this contract has an expiry date, and after which, Fiona is no longer allowed to purchase the shares: 

Contract Option { 

strikePrice = $10 

purchaser = Fiona 

seller = John 

asset = 100 shares of Tesla.Inc. 

expiryDate = 1 January, 2018 

function exercise ( ) { 

If Message Sender = purchaser, and 

If Current Date < expiryDate, then 

purchaser send($1,000) to seller, and 

seller send(asset) to purchaser 

} 

Advantages of smart contracts 

Smart contracts let people negotiate and formalise an agreement without needing the help of a third party, giving both sides full control of the agreement. 

Smart contracts also give its users the following advantages: 

• It saves money 

Because you don’t need to hire intermediaries like notaries, real estate agents, advisors, or brokers, not only can smart contracts make agreements straight to the point, they also help you save on third party fees and charges. 

While regular contracts need the services of a legal practitioner, smart contracts can function without the need for human help. 

They eliminate the need for several middlemen even in a single transaction, so you could use the money you have saved from this on something more important. 

• It ensures accuracy and security 

A simple flaw or omission can result to transaction errors, which proves that smart contracts require users to record all the details, terms, and conditions needed in precise details, an as accurate as possible. 

In addition, smart contracts use the highest level of data encryption, same as what is being used by cryptocurrencies. This can ensure users that their data and important details are all protected. 

Smart contracts are using the safest way to store data in the web. Additionally, their records are stored chronologically, and can be accessed whenever needed. 

• It promotes trust and clear communication 

Like mentioned above, writing and setting up smart contracts leave no room for inaccuracy and misinterpretation, thus encouraging individuals and/or business to communicate efficiently, and to be as transparent as possible. 

With this, users can make sure of smart contracts’ effective, secure, and transparent nature. 

• It promotes the paper-free movement 

Smart contracts only exist in the digital world. As more and more businesses and individuals start to take more care of the environment, knowing that smart contracts can save on a number of reams of paper is definitely a plus. 

These days, smart contracts are already benefiting the insurance, health, government, and business industries. Let’s just wait and see how they can affect more industries in the future. 

How do smart contracts affect legal professionals? 

The appeal of smart contracts is that a piece of code can let an agreement or terms of contract execute on its own. What do the lawyers do now? 

At the Smart Contract Symposium held at Microsoft’s New York Headquarters in December 2016, Szabo stated, “Lawyers worried about losing their jobs to robots, you're actually doing something that's mostly complimentary to a smart contract. Smart contracts are mostly making possible new things that haven’t been done before.” 

While smart contracts will not disrupt the legal profession, it will definitely affect the lawyer’s role in the future. 

The continuous rise of smart contracts will require attorneys and legal professionals in the field of contract law to better their technology utilisation skills in order to keep up. Lawyers will need to incorporate the best parts of traditional and smart legal contracts in their practice. 

After all, “human lawyers” still have the advantage of a better judgment and extensive legal experience. 

Learn more about blockchain, smart contracts, and recent developments in the Australian Consumer Law by attending this Contract Law Masterclass, to be held in L’Aqua Sydney, on 5 March, 2020.