What is a Smart Contract & Why does it matter ?

What is a Smart Contract ? By now, you’ve heard that the blockchain revolution’s going to radically transform the way we do everything. You’re having flashbacks to the early days of the Internet. When WIRED magazine updated the coming techno-future for us every month (and seemed certain that we’d all be calling it ‘The ‘Net’). The blockchain visionaries tell us there’s a radical transformation in the pipeline. If you’re like me, you’re wondering, do people perhaps just have a need to put their irrational optimism somewhere? Is it just that the blockchain is the only optimistic game in town?

If so, you might want to start understanding smart contracts. While the “smart contract” is genuinely a whole new thing that will probably change the world, or at least the way we do a lot of things. The concept is built out of things most likely already have a handle on. If you’ve ever had to use the mute button on one of your Tweeps, you already understand the basic principle behind it.   

When you mute someone on Twitter, you’re giving the website a simple instruction: “if this account tweets, don’t show it on my timeline”. You’re also expecting it to carry out this instruction automatically–without you needing to provide any more input. Or rely upon a trusted Twitter employee to do this because ‘Hey, you promised’.

A smart contract can be understood as an agreement that comes with instructions like these. “If this, then that.”  One defining feature of smart contracts is that they are “self-executing” or “self-enforcing”– they carry out the agreed-to terms without needing to check or notify the people who’ve negotiated the agreement. I’m reminded of the obscure 1981 film TULIPS, starring Welcome Back, Kotter‘s Gabe Kaplan: depressed and unsuccessful at ending his own life, he hires a hit man to do it for him. But then he meets Bernadette Peters, and the two fall in love, restoring the former Sweat hog’s will to live. But he has no way to cancel the contract he’s taken out on himself. Hijinks ensue.

Hijinks being, of course, the very thing smart contracts work against — the very human tendency to renege on a promise, welsh on a bet, or be in breach of a contract.  For example, you could set up a smart contract that pays out a certain amount of cryptocurrency only once a certain condition has been met, safe in the knowledge that you don’t have to check daily to see if it’s been met or not. Ever set up an automated payment with your bank? Same thing. Only without the bank.

If that last part sounds strange, it should. It’s new — almost everything we do requires paperwork of some sort. Sooner or later, and almost all of this paperwork is required and validated by a central trusted institution that both warehouses the information and acts as a middleman. Contracts that operate without these middlemen are unlike the contracts we’ve known and loved (or maybe hated) up until now.

The main difference, the decentralization, is the defining feature of smart contracts, cryptocurrency and blockchains. In the Mute button example I used above, your muting is centralized. Nothing happens between you and the person you’ve subtracted from your timeline that doesn’t go through Twitter. If it’s hard to imagine a Twitter that doesn’t have a central site, that’s only because we’ve grown up with institutions with a central authority. (Wait — does this mean someone could build a decentralized Twitter? Yes. And yes, someone is doing that: Twister.)what is a smart contrat

When you add in the fact that the instruction manual for a self-enforcing contract can be much more complex than “keep the jokers outta my mentions“, a smart contract begins to look like the earthshaking innovation everyone’s saying they are.

Because here’s the other surprisingly transformational thing: smart contracts could start to change the way everybody thinks about contractual agreements. They won’t always require the level of trust we’d normally either presume or have to worry about.

Keeping your side of an agreement, or deciding to be in breach of contract, that’s a thing that humans do. That’s the reason you look at a seller’s feedback on eBay before buying. But with smart contracts that are autonomous — running in the background, looking for certain conditions to be met and then acting on them — people can now create agreements with people without needing to figure out wether they’ll hold up their end of the bargain. “Code is law,” the Ethereum community tells us, meaning: the contract is self-executing; the contract itself will buy the product, send the bitcoins, release the hounds, what have you.

But even if smart contracts operate as though code is law, law doesn’t have to be code. While smart contracts are still subject to the legal systems, they don’t have to reflect it. You might one day enter into a contract that auto-payed a friend in an amount based on the number of steps his Fitbit tracked that day. Once the terms are agreed to and activated, the contract would make the crypto-payments based on this information. Despite how silly and legally unenforceable this would be in a conventional contract.

Remember: many of the potential uses that people are talking about (like this Fitbit idea of mine) will depend on technology that doesn’t quite exist yet. But the work to bring it into reality it is indeed underway. So what are all the truly mind-blowing innovations? What will smart contracts do? Let’s look at what  they’re already doing:

Not long ago, a dairy in Ireland shipped their cheese to the EU and verified the arrival of the cheese on the Bitcoin blockchain(a public record of all Bitcoin transactions). This verification tells a human: OK, now we can pay for that Irish cheese we received.

What is a smart contract

 With a smart contract, nobody has to check their notifications.  Just to find out it’s time to actually pay for the cheese. This might sound like the boss just gets more time on the back nine. But if you’ve ever tried to get your head around the very complicated, costly paperwork. That is normally involved in international trade finance. You will know that eliminating these particular middlemen will save an enormous amount of money. 

Once the Internet Of Things is upon us, it’s easy to imagine landlords and renters entering into smart contracts that agree and promise to lock apartments once the rent is past due.  Hopefully they’ll know to wait ’til you’ve stepped out. Business owners and corporations will be able to create self-directed divisions of their business. Businesses are likely to become more peer-to-peer and personalized. Even financial mainstays like insurance and lending are likely to embrace the ancient slogan of The Whopper: “Have It Your Way.”

Right now, even getting access to that mute button requires you to create an online identity by surrendering sensitive data. That is then stored somewhere you hope is safe. When every other week brings a new story about credit card companies or governments or celebrity nudes being hacked. It would be nice to have a little more control over how you verify that you’re you. A smart digital identity may make it possible to log in to your fave dating site without having to give up your social media stats, while also being much more reliable than a password.

I could list all the ways smart contracts could be changing our lives in the near future, but I’d expect to be wrong about most of them. The Ethereum platform, which brought Nick Szabo’s idea of smart contracts into the real world, still hasn’t found its “killer app”. As cryptocurrency catches on, new legal issues arise. They tend to be pretty complex, as different countries have different ideas about what blockchain technology is.

Not everything needs to be decentralized any more than every bricks-and-mortar business needs to be online. Or every infant needs to start using a smartphone in the crib. It’s also entirely possible that no minds will be blown. We will all still think in terms of a central authority long after we’re all using smart contracts. People still talk about ‘dialing’ phone numbers, and the ‘Save’ icon still looks like a floppy disk for some reason.

As Yoda tried to tell Luke, “Always in motion the future is”.  But the more I learn about smart contracts, the more reasonably excited I feel about the possibilities. Many of the most interesting uses of the smart contract innovation are still only visible on the horizon. But it gets easier every day to imagine a world where we won’t be able to remember how we did without them.