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Hi!

In our last lessons, we talked about intellectual property and advertising.

Today, we’ll look at smart contracts.

Although smart contracts were actually invented in the 1990s, they’ve reached their full potential with the aid of blockchain technology.

A smart contract is essentially a self-executing contract.

The contract is stored within the blockchain, and when a previously agreed-upon event occurs (like a deadline passing), the contract is triggered to execute itself (a payment is sent, a public record is written, etc.).

Unlike a paper contract, the blockchain is tamper-proof, so your contract is safe from hackers or other thieves.

There’s no way to change the blockchain without rewriting the entire thing, which would take massive amounts of computer power and effort, and would still leave records of the original contracts.

When someone applies for a loan, asks for credit, buys a condo, or begins a new job, a contract is created to legalize the agreement between the parties.

This contract will specify and record the terms of that agreement and the required actions of each party.

By itself, a traditional paper contract has no power to enforce those terms, thus requiring the services of a legal or governmental third party to oversee the execution of that contract.

If the terms are not met, the parties must rely on the intermediary to rectify the situation and enforce the contract.

With recent advancements in Distributed Ledger Technology (DLT), lawyers, notaries, or other middlemen are no longer required to oversee a contract.

Using a smart contract, people can execute and enforce the contract without third-party involvement.

Let’s look at an example:

A seller agrees to send 100 products to a buyer, for the price of 1 bitcoin each, by a specific date.

This agreement is written into an encrypted smart contract and put into blockchain.

If the buyer doesn’t receive the goods by the specified date, the cryptocurrency won’t be released and both parties will be notified of the contract breach without the need for any human supervision or intervention.

Think of the smart contract as a vending machine.

You put in your money, and the machine records the transaction and distributes the product.

In this analogy, the distributed ledger technology would be the hardware of the vending machine.

Some benefits of using smart contracts include time savings, cost-effectiveness, security, and ease of use.

Some drawbacks include human error, automatism (also a benefit), legal enforceability in some parts of the world, and difficulty using cryptocurrencies.

In our next lesson, we’ll take a look at storing digital assets.