by Lumai Mubanga
A smart contract is a term familiar with blockchain technology. It sounds futuristic, exciting, and promising. The term was coined by a computer scientist in the 1990s even before the advent of blockchain as we know it today. It is simply a computer protocol, some lines of code that automatically execute a specified action, like releasing a payment, when certain conditions are fulfilled. But are smart contracts in their current form really smart?
There are arguments for and against this concept. This article will explore some reasons why some feel that in its current form, smart contracts are really not yet smart and compare that to what these actually do.
Application of smart contracts
One example of situations where smart contracts are used on the blockchain is air travel. Suppose you have your airline ticket insured by your favorite airline. The terms of the contract may stipulate that, if the airline fails to facilitate your travel due to delays, the insurance company will refund you forthwith to allow you to get on the next airline. In this case, you quickly get refunded automatically and you can buy another available ticket on the next available airline.
Why others feel they are not smart
In this case, one condition must be fulfilled before the other activities can be executed. The airline must fail to meet its promise to facilitate your departure before the insurance company refunds you. This sounds smart but why the argument that it is not? Simply because the computer code is not the actual contract. Besides, its not smart because the insurance company must negotiate the terms and conditions to be coded under which such a refund must be made. But if these are not smart contracts, why are they popular and special?
Why smart contracts are special
To appreciate why they are special, we need to think about a huge investment potential involving millions of dollars. Imagine you need to buy real estate abroad. You have never met the seller and you have only viewed the property online. Huge sums of money are at risk and you need to trust that the seller will meet your expectation as this is your first deal with him. There is a lot of uncertainty about payment, delivery, and quality of the property. What if you found a third party, perhaps a broker to make payments for you, see the property, get the title for you and assure you that the property is real and worth the price? In this case, two conditions will be met. You will make the payment first and the property titles will be released to your names and custody. This simple logic is the whole essence of smart contracts.
How does this relate to blockchain?
With blockchain technology, these smart contracts can be embedded on a blockchain. They are not only visible to concerned parties but are widely visible for inspection on the whole blockchain. All concerned parties, lawyers, banks, etc with access to the blockchain will be able to see the transaction. This has many advantages. Most of the processes will be done automatically including payments and transfer of ownership. It saves time and money and removes a lot of transactional friction. It removes a lot of uncertainties such as payment methods, quality of the property, and authenticity of the seller even if you are meeting for the first time. Is this not a smart way of doing things?
You are free to form your own opinion.