Understanding Smart Contracts - Part 1

Everyday, people, businesses and other organizations interact. They make exchanges and come to understandings. The most important parameter for these transactions is trust that both parties would behave in a certain way following a set of implicit or explicit rules. This trust is informed by the rule of law, protective regulations, economic incentives, reputation, brand recognition and a variety of other factors.

Increasingly, technology is being used to underpin trust. For example secure web browsing (https) gives us confidence when shopping online. Distributed ledgers are an emerging technology designed to enhance trust through cryptography, peer-to-peer networks and financial incentives. One of the innovations enabled by distributed ledgers are Smart Contracts. The promise of Smart Contracts is that they enable transparent, auditable and efficient interactions without relying on existing trust mechanisms such as the legal system and brand reputation.

One of the biggest questions being asked by industry experts and blockchain critics is whether smart contracts can realize this promise in industries that are already underpinned by existing trust mechanisms.

Smart Contract Origins

In the year 1996, long before bitcoin was conceived in Satoshi's mind, computer scientist, law scholar and cryptographer, Nick Szabo presented the concept of Smart Contracts to the world for the first time. In simple terms, he wanted to use a distributed ledger to store contracts.

Nick Szabo's model contract was the vending machine. He presented the vending machine as an essential type of electronic contract. The "offer" in legal terms to the passerby is to put money into the vending machine and get something in return; food or beverage. On accepting the offer, the passerby puts money in. Offering and Acceptance are two elements of a contract and then the delivery is the performance of the contract. Nick's vision was to take something like that and put it in the form of a software and that would be a Smart Contract.

Well, here we are 24 years later and we've got several emerging technologies such as the blockchain, which has a lot of potential to disrupt a lot of industries and people are already starting to play around with the implementations of these smart contracts.

Smart contracts are expected to disrupt a lot of industries especially intermediaries in industries. They will significantly redistribute power and wealth if implemented properly. That's the decentralising function of blockchain. Only few industries will remain untouched. And yes even corporate lawyers will surely be impacted.

Corporate lawyers will need to adapt to their new roles as smart contracts become more prevalent in the business world. This will create friction and a huge turnover, driving certain folks out of the business. The internet did that, as well. That's what change does. It clears out the stale and stalled, ushering in the new. What it won't do, is significantly change the overall opportunities in law and other contract-related professions.

All over the world today, people have realized the vast technological evolution that has greatly shaped the production and management functions of business entities. Traditional contracts can take weeks or even months to initiate, and there have been numerous instances of breaches and lack of trust for contracts in both the private and public sector.

The emergence of advanced technologies has led to increased competition between businesses as each tries to utilize the latter to bolster the employees' productivity and the general performance of the firm. As a result, tecnology has become a critical backbone of organizational operations and a core driver of organizations’ innovations and competitiveness.
Any financial transaction that is carried out by an organization with third parties can be viewed as a form of a contract, however simple, or complex the transaction is.

Essentially, financial openness and transparency are some of the core aspects of successful organization management as they create an environment that is conducive not only for investment but also for the establishment of trust with different organization stakeholders.

A smart contract can utilize blockchain technology to digitally enforce, verify, or facilitate the performance or negotiation of a contract. Owing to the security and decentralized system exhibited by blockchain technology, smart contracts can foster transaction credibility between contracting parties without the necessity of third parties as exhibited in traditional contracts. Any business organization that aims at achieving greater heights in management and production dimensions must consider utilizing robust technologies that are aimed at bolstering its competitive edge.