What’s a smart contract, anyway?

What’s a smart contract, anyway?
Comments Off, 06/07/2015, by , in Event Highlights, Funding Tips, Startup Tips

Bitcoin expert Leonhard Weese explains in layman terms (sort of) what separates ‘smart’ from traditional

A traditional contract can be any agreement made between two or more parties. Smart contracts are essentially contracts between machines. These contracts are made up of dozens or even hundreds of smaller agreements. While common law doesn’t specify too much how these parties may come to each agreement, it has taken courts a long time to accept clicks, electronic messages and signatures as binding.

Smart contracts have faced several hurdles, all of which have recently become within arms reach through the revolutionary innovation of the Blockchain, a decentralized ledger, or collection of financial accounts. There are several blockchains, the most commonly known of which is the Bitcoin blockchain.

There are limits of traditional, manually signed contracts between real human beings and thus smart contracts could really be purposeful.  But having machines interact with each other is complicated.

counterparty

Here are the complications: 

1. The first issue is identity.

On the internet, your identity is anonymous and easily and quickly changeable. 

Smart contracts try to fix this issue through centralization, such as email providers like Gmail or identity services like Facebook. But this comes at the cost of your privacy and creates monopolies that restrict free and open exchange.

On a blockchain, we can register identities and make them public. We can maintain them as pseudonyms, under our real name or business entity. While we can theoretically create an indefinite amount, each identity comes at a cost. 

2. The second issue is trust.

To build trust in your online identity, you can connect them to your physical or virtual presence to convince the public that you are invested in this identity. 

Once you have built your public identity on the blockchain, you can then use it to vouch for you, in the same way you would use a bank reference letter to vouch for you, or a business partner or any other public recommendation. 

But unlike the Hong Kong companies registry, computers will be able to interact with your identity, and your online identity will be able to go into automated agreements with other parties, such as sales agreements. 

3. The third issue is payments.

Programs, computers, fridges or robots are currently unable to plug autonomously into our payments infrastructure. With a lot of effort you might be able to authorize them to make payments on your behalf, but credit card systems tend to disapprove of such systems.

For a machine, ‘will’ might always remain a mysterious concept, but as long as you have a non-reversible payments infrastructure that computers are able to use, such as virtual cash systems on blockchains such as Bitcoin, you don’t need to wait for will. You just need to wait for the payment.

4. The fourth issue is enforcement.

Often, enough payments need to be deferred however, or held in escrow. If you want to sell your distribution rights to your latest music video online to the anonymous highest bidder, which do you transfer first, the rights, or the money?

In reality you will send them at the same time, and that is what is called a  “smart contract.” Smart contracts build on top of many other types of infrastructure, such as the internet itself, a distributed ledger for identities and trust and a reliable payments channel. 

Like identities and payments, smart contracts will also very likely live on a blockchain and ensure that you only use the distribution rights to your art work if the full amount is being paid. 

As long as both property rights are recognized in the virtual space (which for bitcoins and some forms of identity is already the case), there won’t be a need for any arbitration process or court. The accounting and legal professions may be seriously disrupted by the internet’s eternal quest for efficiency and democratization.

To learn more about about smart contracts, Bitcoin and decentralized ledgers, attend the culminating event of the TusPark Bitcoin Panel Series  July 7 at Tuspark HK Innovation Hub, 118 Wai Yip Street, Kwun Tong. Register here.

leo

3 ways your startup can use smart contracts today: 

1. Issue tokens on the blockchain

If you are already giving away loyalty points, share options or your own currency, why not do it on the blockchain? Counterparty creates easy to use tools for example, and your customers, employees can start trading your tokens or building all sorts of applications on top of them

2. As proof of existence

You have a document, picture or any file, and you later want to prove that it existed exactly in this form at a certain point in time. 

Write your proof into the Bitcoin blockchain, and you have time stamped it with the power of encryption. You are the only one who can see that document.

3. As a way to make your loans more flexible

As a startup, you need flexibility in your loans. But these contracts also need to be easy to read and automated. Dr. Joseph Wang, based in Hong Kong, provides templates for loan contracts coded in javascript free of charge on his Github account.

About Hannah Leung