Everyone knows about Bitcoin, but bitcoin is just one application, a type of cryptocurrency application, of blockchain technology. There are other ways to use a blockchain, and one of these ways is called Smart Contracts. Smart Contracts allow you take this same type of functionality of assigning a value, and assigning different conditions to it so that you can work the entire exchange of something of value.
Let’s use the example of buying a house. The first thing you need to do when you buy a house is find out who owns it. You then need to come up with some sort of legal agreement that will allow you to assign ownership of the house from owner A to owner B. As it currently stands you need third parties such as brokers, banks, and title companies to be involved in this transaction.
But if you can create a colored coin or blockchain token of any type of property, why would you need a third party to sell a house? Why not just do it over the internet the same way you would do an exchange of value from one peer to another. That’s exactly what smart contracts allow us to do.
Smart Contracts disintermediate the process of any type of contractual obligation the same way bitcoin disintermediates the transfer of money.
Once you get the premise that you can build value and tie it onto a blockchain and transfer value digitally by using a blockchain, then you can expand beyond that and give it all the agreements and requirements of a contract and have it all automated.
A smart contract is nothing more than a computer program that takes all the concepts of what a contract would do and automates that by building it on a blockchain. Because it’s running on a blockchain, the program will be self-executing and immutable. That means you can rely on contractual obligations to be done automatically. You don’t have to worry that a third party may tamper with it or that it may be subject to a malicious hacking or anything along those lines. It also reduces cost, because you don’t have to pay a third party to process this. It’s all handled conveniently by a single contractual program that runs it.
The Birth of Smart Contracts Smart contracts is one of the most exciting areas in the space of blockchain. Nick Zabo, widely regarded as the father of smart contracts, wrote about smart contracts as early as 1994 where he said the following:
“A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs.”
DAOs and DACs Smart contracts are a way for computers to actually do the type of interaction that would be required to do in any type of contract or agreement in a disintermediated, automated, self-executing and immutable way. If you take all of these agreements and start combining them in different ways, you could develop what is called a Decentralized Autonomous Organization or a DAO. You will also sometimes hear the term Decentralized Autonomous Corporation (DAC).
A Decentralized Autonomous Organization is a collection of smart contracts. When you look at an organization, you are really looking at a collection of agreements. An organization establishes different parties that have different things they need to do and who may reach inflection points where they need to interact with each other. There are certain rules for doing that interaction.
If you replace the term agreements with smart contracts, you can replace an organization with a Decentralized Autonomous Organization, by having a collection of smart contracts that runs automatically. Because a DAO runs on a blockchain, and it’s running on a distributed network, you can have multiple combinations of different parties exchanging value and reaching agreements. To a Decentralized Autonomous Organization, it doesn’t matter if you are a human or a robot. You can have devices communicating with devices, or devices communicating with people, or people communicating with people. To a DAO it makes no difference. Because as long as it’s programmed into this collection of smart contracts, the whole thing can run automatically and immutably.