What if a legal agreement could be monitored, executed and enforced without the need for human action or interference? Imagine a world in which a string of code could recognise the fulfilment of conditions, automatically transfer assets at the agreed times and register those transfers. That is the world of the smart contract.
A smart contract is a piece of computer code that is capable of monitoring, executing and enforcing an agreement. On the one hand, a code that states: “if X occurs then do Y” is not a new concept. It is how conventional code has long interacted with existing systems. Monthly direct debits out of a bank account for example. However, a smart contract takes such coding, and combines it with the potential of the blockchain to interact with multiple financial systems, asset registers and more.
The potential of smart contract
By placing a smart contract on a public, permissionless blockchain, the control over the execution of the agreement would no longer be in the hands of a single party (e.g. a bank) and interaction would no longer be limited to closed systems (e.g. centralised bank ledgers). The proper execution of contracts could be verified by the network of computers connected to the blockchain. That same network would update the blockchain to record the execution of the contract, and then monitor the blockchain for compliance with the terms of the smart contract.
A smart contract, distributed and replicated across a blockchain, could revolutionise the way business is done. Potential uses are numerous: property ownership could be transferred automatically upon receipt of cleared funds; credits under service level agreements could be automatically paid at the point of violation; and securities could be traded without the need for central securities depositories.
The future of smart contracts
A blockchain with sufficient interconnections between financial systems and asset registers does not yet exist and might never exist. Even if it did, smart contracts still have their limitations.
On its face, code is certain. It is a pre-ordained manipulation of inputs to produce an expected output. Contrast this with conventional language – a minefield of ambiguity, sub-text and misunderstanding. The certainty of a smart contract is therefore seen as a key advantage. If the code works, there should be no misunderstanding as to intention, and it can be replicated repeatedly and cost-effectively, for analogous transactions.
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