You have stumbled across this word you’ve read it on the internet sometimes you thought well that’s not important for me. Sometimes you thought, well, what does this actually mean? Well, today, we’re gonna talk about what are smart contracts and why are they important. Why are they here to transform our whole economic system?
You might think “Wow, this sounds too complicated”, but we’re not gonna talk about the technical stuff. We’re just gonna be talking about what can you use smart contracts for and how will they change the world we’re living in.
Let’s dive in and talk about
What are smart contracts?
When you talk about smart contracts you have to understand what contracts are and why contracts are important to this world. When we think about contracts we think about big paperwork, we think about liars, we think about signing papers but it’s much more simple than that because a contract is actually an agreement. When you agree with a friend: “hey let’s meet tomorrow at 12 o’clock”, then this is a sort of contract.
This is a special form of agreement. You could also make the agreement: “well i want to sell this skateboard” and your friend says “no problem i would give you 50 euros for this” Then this is a special form of contract.
This is a purchase contract. There are also working contracts. When you say to an employer “hey i want
to work for you” and he says “well no problem i’ll give you this amount per hour”, then you have an agreement. Then you form a working contract. A special form of contracts or of agreements is the bet. When you bet on something then you form an agreement on what happens if this happens. So “if if tomorrow it’s 20 degrees celsius I
will pay you 10 euros” and the other person says “well okay i bet against it. And if the temperature rises above 20 degrees then you will give me 20 euros.” So we can also make agreements about the future.
Contracts are important
Contracts are very important in our economic world. With contracts we define who gets what when what is done. Contracts are the most important feature of how we transfer value in our societies the problem is if the contract is not fulfilled. If one side of the agreement doesn’t want to fulfill the contract. If somebody says “I have never made an agreement with you” or if somebody says “well technically it was above 20 degrees but we didn’t define if it was celsius or fahrenheit” for example or if somebody loses the bet but just doesn’t want to pay.
Then the contract becomes even more important. Then – and that’s why we have contracts so many times in written form – then we need to prove that there was a contract. We need to prove what was written in the contract and we need to prove what happens if the contract is not met and that’s why there are so many lawyers.
That’s why there are so many judges. That’s why there are so many disputes about contracts.
Tally sticks as contracts
In ancient times people used tally sticks. Tallysticks were a form of contract where you could also write down how much one party owned the other. So you would have a stick and you would write down the agreement on the stick. Then you would break the stick and because this pattern was unique on the stick both sides knew when it came together: “oh this fits together so this is the contract” So tally sticks were a special kind of working against counterfeiting contracts.
Okay and now you might say but what about smart contracts?
Why is it called a smart contract?
Well a smart contract is something in between Judge Dredd and Robocop. When you think about Judge Dredd: He was judge and executor in the same person. So he decided if the law was fulfilled and he executed on it.
Robocop was a machine that was a police officer and he executed orders.
So a smart contract is a mixture of this because a smart contract is a contract written on a blockchain. We’ve already produced a video about what blockchain is and why it’s important
One part here is that you cannot counterfeit a blockchain so what’s once written on the blockchain stays on the blockchain. That’s why it’s so useful for contracts because when two sides agree on a contract they both want at the beginning that it’s written down so both sides are going to fulfill this contract. That’s why it’s good to use something that can’t be altered, that can’t be changed afterwards and that’s the blockchain technology.
Cecause the blockchain is distributed there is not one party that could change the contract afterwards
Why are smart contracts smart?
Okay but why are those contracts on the blockchain smart?
They are smart because they are Robocop and Judge Dredd. Because you can program those smart contracts. You can tell them if this happens then this. For example:
Imagine you’re betting with a friend and you would nominate a judge. You would say “okay you get this one euro and if I win the bet I get the Euro.” If the other person wins he or she gets the Euro. The blockchain does this automatically. You can program those bets onto the blockchain. So the blockchain can see now if something happens.
Then it will pay this bitcoin to one receiver.
So the blockchain is the judge. It can judge if this happens or this happens. But it’s also the executor because if a happens it’s gonna give the bitcoin to person a. If b happens it’s gonna give the bitcoin to person b.
So it’s also a judge. And it’s an executor. And it’s a robot because it makes those things automatically
What technologies for smart contracts?
Important technologies here are Ethereum or Cardano.
When people think about blockchain they always think about speculation. They always think about those coins you can buy or sell, but this is only the tip of the iceberg. Because Ethereum is actually such a smart contract system.
Yes, you can buy the coins but this only makes the blockchain more secure. It makes the system more secure so that those contracts on the blockchain on the ethereum network cannot be altered or changed afterwards.
So the tokens you can buy or sell are actually here for securing the whole networks that’s beneath it. So with this programmable blockchains a whole new world has opened because contracts are so important in our today’s world. You have to imagine before the internet you have to really sign a paper, send it to the other person. With the internet you can use contracts over the whole world electronically and ideally you don’t even need a judge. You don’t need a lawyer. You don’t need an executor.
Smart contracts make us more efficient
And we’re just starting with this technology. This is why this is so exciting!
Contracts are one of the most important systems of how we transfer value in our societies. So if this value transfer becomes much more efficient then our society and our economies could become much more efficient. One can only imagine where this will lead us.
What is going to be developed.
How smart contracts are going to change our world. This is a very exciting topic!
Okay: we’ve learned what are smart contracts and how they are used today. When somebody asks you in the future: “Hey, what is a smart contract?” then you can say:
“Well it’s Robocop and Judge Dredd in one!”