In the 1990s, smart contracts were first introduced by Nick Szabo, an American computer scientist. The innovation was developed to perform multiple functions such as issuing receipts, releasing passwords among others. However, during the initial stage of the development of this technology, it was not intended to be part of blockchain. According to Szabo, smart contracts are digital protocols that utilize mathematical algorithms to execute transactions if the conditions placed are met.
Years after, the world witnessed how smart contracts became part of the blockchain infrastructure.
What is a contract?
To better understand the concept of smart contracts, let us go back to its foundation which is contract itself. A contract is an agreement executed between parties for the performance of an obligation. It may be agreed into in written or in oral form. It is usually legally binding and coercive in nature. In a contract, provisions are generally supplied to let the parties know the conditions they have to fulfill.
For instance, A will pay B an amount of PHP 20,000 if B delivers the former 10 sacks of rice. In this example, the delivery of 10 sacks of rice is the condition. The payment of PHP 20,000 is the resulting action.
How do smart contracts work?
The way smart contracts work is similar to the example above. All the conditions and resulting functions are inputted into the algorithm. It is typically in an IF-THEN form. When the IF part of the statement is fulfilled, the computer protocol causes the THEN part to be executed. The THEN part can be anything that can be programmed into the code. The code automates the next steps in that transaction.
This automation gives leverage to smart contracts against the normal ones. With the technology, the advantages of speed, independence, reliability, efficiency, and accuracy are all brought into the business transaction.
Where can smart contracts be applied?
From small entrepreneurs to multinational conglomerates, everyone who makes use of a contract can find an application for smart contracts. It may be applied to finance, commerce, insurance, taxation, auditing, credit enforcement, legal processes, and government services.
For example, the owner of a makeup line can use a smart contract to automatically pay YouTubers she selected. The owner can set up an account in a cryptocurrency platform. She can then attach a smart contract to this to indicate the conditions of the agreement. Such that a certain amount shall be released to the account to the YouTuber/influencer once the latter has reached 100,000 views.
There can hardly be a limit to the range where smart contracts can be applied.
It may seem that smart contracts are too good to be true. They are fast, convenient and cheap. The question now is where does it go from here? Knowing that it is a good innovation is way different from knowing that people are absolutely going to use it. After all, the end goal of all this is to engage people in the platform. The challenge for developers now is to create smart contracts that businesses are actually going to use. What it means is that, the protocol should be adaptive to the peculiar needs of a business and not just a one size fits all mathematical algorithm. Since this is a new process and not many coders offer to personalize smart contracts for companies, choices of developers are somehow limited and expensive.
What are the disadvantages?
Smart contracts are also far from perfect. There are many issues smart contracts may encounter such as the presence of bugs in the code, government regulation, and tax implications.
Take for instance the example provided above. In a traditional contract, if the YouTuber defrauds the make-up company, such as when she illegally boosted its view count to meet the 100,000 threshold, the company can rescind the contract. There will be legal protection available for the defrauded party. However, in a smart contract, once the THEN part of the algorithm is performed, it will be almost impossible to annul it. Remember that smart contracts run on a blockchain platform and a key feature of blockchain is immutability. The money is already transferred; and ideally, it cannot be recovered.
Smart contract is still far from perfect. There are still a lot of ground to cover and a lot of glitches to solve but no one can deny the fact that it may revolutionize the way people do business.
Who makes use of Smart Contracts?
As of today, a lot of platforms already offer the utilization of smart contracts. For instance, the leading smart contract processor/ coder is Ethereum. Ethereum is a decentralized platform. It utilizes a global infrastructure that allows value and ownership transfer. It is considered the most advanced platform for coding smart contracts. Users can code whatever they want as long as they pay for computing power. Some other platforms that offer processing smart contracts are Side Chains and NXT.
Know more about Ethereum.
How can it benefit the Philippines?
The use of smart contracts can bring numerous advantages in various areas such as business transactions, government procurement, and legal services, among others. For instance, the Philippines’ micro, small, medium enterprise can truly benefit from this technology that can offer cheaper costs of transaction fees. Since the process eliminates the need for middlemen, the profit margin for these MSMe’s can be higher and thus help these businesses. It can also play a part in the eradication of corruption in the government. Government contracts can be converted to smart contracts to limit the number of people involved in the processes. The lesser number of hands the money goes through, the lesser chance it gets misallocated. For as long as smart contracts are programmed properly, it can indeed improve a lot of people’s lives.