Kassandra Learn: What are Smart Contracts? (Part 1)
In a nutshell
Smart Contracts use blockchain technology to create contracts that “enforce themselves”. That is to say, smart contracts can be programmed to come into effect when different conditions are fulfilled. These include automatic transactions for hitting targets or confirming agreements between potentially anonymous parties.
One feature of these “trustless” agreements that makes them truly radical is that they do not need a third party to arbitrate or enforce the contract conditions. If the contract is properly and carefully outlined in advance, smart contracts offer a level of certainty that saves time in contract execution and allows all parties to the contract to be sure of the outcome.
How does a smart contract work?
Smart contracts are simply code on a blockchain that follows a conditional outcome. While this will be familiar to people with programming experience, the concept is simple enough to understand linguistically. In the English language, conditionals simply mean “if A happens, then B should be the result” or “when C happens, D should follow”.
This is the cornerstone of any form of contract: if the conditions for the contract are met, then the contract should be executed according to its terms. If it is not, there needs to be some form of repercussion or remedy to solve any conflict or contradiction.
So what’s the difference between smart contracts and traditional contracts?
With a “traditional” contract, a framework of external forces is needed to maintain trust. Let’s consider an example where one party doesn’t follow the contract: a company doesn’t pay a contractor for their work. After chasing up their check with the company and getting nowhere, the contractor now has a choice.
They could invoke an external authority such as law or small claims courts to attempt to fix things and reclaim their lost money, time, and reputation. Often enough, this can lead to further problems, such as:
- the cost of legal representation (which often favours the larger or richer party and pushes smaller parties to settle for less than they have earned)
- complex contracts that require arbitration (third-party decision-making) instead of legal settlement, where arbitrators are often selected by the “stronger” party and customers or small parties lose out
- companies that declare bankruptcy while a claim is in processing, which further complicates matters and may push certain expenses (like contractors) down the chain of priority as the company is carved up to satisfy all its debts.
This problem is compounded for our hypothetical contractor if they’re a freelancer working remotely. This could be in a field like IT outsourcing, design but also, more often than not in our post-pandemic world, one of any number of jobs that can be completed off-site.
Even delivery of physical goods and materials requires trust. In any circumstance, goods or services, the parties are typically in different states or even different countries that have multiple conflicting jurisdictions and legal entities involved in enforcing the deal. This also adds problems associated with currency issues and fluctuations to the mix.
No wonder many contractors decide that the effort involved in reclaiming lost expenses is not worth pursuing for limited returns, forcing them to take the hit and try to struggle on. Issues like these strangle innovation and productivity which has a massive impact on the number of productive new SMEs, a vital indicator of a country’s financial health and the lifeblood of the US economy.
What can Smart Contracts do to help?
However, smart contract automation means that external authority concerns are essentially eliminated. A blockchain network of computers verifies the conditions of the contract have been met or appropriate actions have been taken and then follow their pre-determined course of action.
This action could be as significant as sending a payment or as simple as sending a notification. While this might seem like a basic update to existing traditional contracts, if we set our mind to thinking creatively about the implications of automated contracts then the potential for smart contracts to reshape our world is truly remarkable.
Even better, because blockchains are immutable and cannot be edited, the terms and conditions are “set in stone”. Parties with permission, including enforcement parties (if needed), can see the results and determine what and how conditions have been fulfilled. Transactions can’t be rescinded or trapped in escrow. If necessary, the parties don’t even need to know each other personally because the “trustless” automation of the smart contract means all parties can be assured they won’t have to chase each other up.
So where next?
Now that we have a thorough grounding in the concepts that underpin smart contracts, we’re going to follow up next week with an article where we explore real world use cases of smart contracts already in action. Some of the areas and applications might surprise you, a testament to the fact that the radical effect that smart contracts and blockchain technology can have on our world is only limited by the imagination of the parties involved.
We’ll then discuss how Kassandra plans to use smart contracts to reward and encourage our users to save wisely and get involved in creating a community that helps and include everyone: from the crypto savvy to new investors.
