What are smart contracts?

Team Luno
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4 minute read

Technology is poised to change our future in deeper ways than the Jetsons ever could have predicted. Our cars won’t be folding into briefcases just yet (we wish!), but how we go about our business operations is likely to get a facelift.

The same way the internet (and thus the rise of eCommerce) turned us into next-day delivery fanatics, blockchain, the technology behind cryptocurrencies like Bitcoin, promises to simplify up our entrepreneurial gymnastics.

smart contracts blog

It can be extremely complex to navigate our existing financial system. However, it’s not the only part of our lives affected by bureaucracy and non-digital (i.e. paper 🤢) documents. These activities currently involve a multitude of people from accountants and lawyers to registrars and officials. Think of highly bureaucratic processes like getting your driver’s licence, applying for a loan, doing your taxes, or managing your will and testament (we’re betting none of these currently spark joy for you) - but what if they did?

Cue the future: Smart contracts aim to make everyday life more efficient and cost-effective by automating processes and agreements based on secure data. These smart contracts offer us the opportunity to facilitate otherwise admin-intensive tasks. So you must be thinking, “Ok great, these smart contracts you speak of will change my life, but how exactly?”

WTE?! What the Ethereum

Smart contracts operate on blockchains. This public peer-to-peer network intends to act as a global computer on which different types of data can be stored. Decentralised apps (also called dApps), that run on the Ethereum blockchain, can access the data stored there and use it. DApps are built by developers from around the world to improve the finance industry, personal document storage, governance and series of other areas. On the Ethereum network, you can have smart contracts.

What happens on the technical side? A contract, or rather its components, can be converted into computer code and is then relayed to all of the computers, or nodes, on the network. That way, the agreement terms are now decentralised and transparent (while still remaining pseudo-anonymous). Once the rules and penalties of the contract are defined, the agreement can be automated and irreversibly enforced. Like Bitcoin transactions, smart contract executions are recorded into the blockchain ledger cryptographically and are immutable.

Smart contracts in action

So what can we do with these smart contracts? They can be automated, sure, and they guarantee fulfilment of terms, but unless you own a business or have legal trouble you don’t need them, right?

Wrong.

We all enter into agreements for goods and services every day. Even small things like paying for your bus fare is actually a contractual agreement between you and the bus service provider.

You agree to pay the fare in exchange for a ride to a destination on the bus route. From there you can see the number of ‘contracts’ we enter into on a weekly (if not daily) basis only grows. So think of a taxi, when you get into a cab and give your destination, you and the driver now have an agreement. But how does he know you’ll pay at the end of your ride, and how do you know he’ll drive you to the right place?

You both have to trust one another to do the right thing. While a taxi ride across town might require a low level of trust, when it comes to executing your last will and testament it’s a high stakes game. Speaking of which, it’s also one of the most admin-heavy processes that exist. They involve a significant amount of documents and plenty of people.

Leaving your legacy, where’s your contract?

So let’s take the example of Lucy, the wise person who has decided to set up a will before they pass. They can keep their documents, like identity docs and title deeds, on a smart contract detailing their will and testament. Lucy’s estate could be transferred automatically to her selected successor; they would receive title and ownership instantly upon verification. No need for the involvement of legal professionals or extra costs. The time and resources saved in this automated transfer can add up to a lot of kibble.

So here’s why we see smart contracts as capable of changing our future. Automating and lowering costs in transactions and agreements means people have more time and resources to do more. It opens space for innovative businesses and clearer agreements.

Smart contracts, our magic carpet to the future

If you can create a smart contract and be sure that the conditions will be maintained even if you don’t trust the other party, what will that enable you to do? Perhaps you’ll have the confidence to get the larger order you need from your slightly-iffy supplier, since you know if they don’t deliver, the automated contract will immediately dock their payment. Perhaps with the ease and peace of mind that comes with smart contracts, people will dare to go further.

Smart contracts remove the need for middlemen, automating and lowering the cost of doing business. It empowers and enables people who currently rely on third-parties. Effectively they can alter the architecture of a range of enterprises and move employment away from the essential core to the edges with gig workers.

The future, after all, is not predicted but created and we’re with those building a whole new world. Want to learn more? Head over to our Learning Portal.

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Team Luno

On our way to the moon, we write about all things crypto. And don’t forget we’re humans too. Our blog conveys the views of Luno and the many unique opinions and characters within our team. We’ll never provide you with financial advice, and we urge you to conduct your own research before purchasing or trading any cryptocurrencies. It’s a brave new world out there, and the market can be volatile at times, so never trade with funds you can’t afford to lose. Want to let us know how much you love our blog? Tweet us @lunomoney.

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