Much before the terms Bitcoin and Blockchain came into existence, a computer scientist, cryptographer and law scholar called Nick Szabo, had proposed the idea of using cryptography for writing and agreeing on contracts. Agreements or Contracts, as you might know, are written documents which bind involved parties to fulfill a task under certain terms and conditions. He had written a whitepaper called "The Idea of Smart Contracts" which proposed this new thought process.
His idea was simple - make a contract self-binding, autonomous, immutable, decentralized and transparent. He said that any contract can be turned into a programme code which will automatically bind everyone involved to honour it. This autonomous program will execute based on certain terms and conditions without the need of an intermediary to oversee the fulfillment.
Sample use case - Automatic Reimbursement System
Let us take into consideration a simple use case. Imagine you have done some travel on behalf of the company you work with. At the end of your journey, you have to submit your bills for reimbursements. The company has created a system wherein as soon as you upload the bills in the system, the system sends you the reimbursement without any approvals.
Ticket Vending Machine example
Another way to demonstrate this idea is to consider a ticket vending machine. The machine is pre-programmed to give you the ticket as per your purchase and need. The software inside the machine is the smart contract and the machine is the node which fulfills the contract.
Why Smart Contracts?
The advantages that smart contracts bring are as follows:
- It is Cost-effective as there is no need of expensive legal services.
- The smart contract will be Secure due to the cryptographic nature of protection.
- The pre-tested contract software program will always be accurate without any errors.
- The contract can work in a trust-less environment i.e. even strangers can sign contracts as there is guarantee of fulfillment.
- This is a self-executing code system - it is autonomous.
- Smart contracts systems are fast as they are executed immediately as and when the terms are fulfilled.
- Smart contracts transactions can be tracked real-time which in turn also save costs of auditing.
End Notes
Programmable agreements make for a viable alternative to cumbersome traditional contractual processes. The future or contracts is going to disrupt with this new technology.
Read more about Smart contracts in my following articles: