There’s a lot happening. Incredible 5G networks are being rolled out, as we speak, by telcos around the world, facilitating the Internet of Things. Artificial Intelligence (AI) is taking over more unproductive tasks each week. And Bitcoin, the currency of the future, is making techno-finance headline news with discussions centering around bubbles and the end of banking services as we know them in equal measure. Each will contribute to potentially unprecedented economic growth.
One of the core concepts involved in the use of Bitcoin is ‘Smart Contracts’. Smart contracts could well change your life just as much as better communication technology or embedded AI. They are a major component of the productivity enhancements the technology will deliver. But what are Smart contracts and how exactly will they save you money ?
Starting at the beginning – Blockchains are where the magic happens
The key problem with the understanding of cryptocurrencies like Bitcoin, is the number of overlapping new concepts that people fresh to the subject, have to internalize. One of the key components of these cryptocurrency ‘new forms of money’ is the ‘ledger’ that sits behind them. Luckily, this particular feature is both easy to understand, and the key to the future success of smart contracts.
Any cryptocurrency transaction which is undertaken is ‘written down’ in several versions of a ledger, known as a Blockchain, around the world, at the same time. When you hear Bitcoin described as a ‘decentralized’ currency – that’s what they mean. The record of cryptocurrency transaction is stored in several places at once, not just in the systems of two banks – which is how things used to work.
What is a ‘Smart Contract’ ?
Smart contracts are conditional decentralized transactions. They are known by many names, including self-executing contracts and blockchain contracts. Smart contracts allow logic to be built in to an agreement.
How will ‘Smart Contracts’ save me money ?
It is often said that banks simply ‘sell trust’. They operate in highly regulated markets, are backed by the government and are subject to extremely strict legal rules over how they operate precisely so that people can trust them.
Many of the things banks charge for involve handling the ledgers which currently track transactions. For example, when you move money internationally, they charge you for the service – but all they’re doing is using an existing agreement with a bank in the country you are trying to transfer the money to. Smart contracts negate the needs for banks by sidestepping this requirement and ensuring your requirements for trust are met elsewhere.
An example might help make this a little easier
Consider the process of buying a house, as it stands now. There are a number of criteria which need to be met, in order to facilitate the transaction. The activities which are undertaken to work through the process, at the moment, involve an expensive litany of professional services from lawyers to estate agents to banks.
Keeping it simple, for the sake of the example, however, explains the value that smart contracts can add. Imagine that, to buy your house, you simply needed to a) Prove your Identity and b) Deposit the asking price in to a particular bank account. Currently, the bank might conduct both of those services, allowing you to go in to a branch and fill out some paperwork, with 100 points of ID and helping you work through the mortgage application forms to free up the money you need.
In a blockchain / smart contract world, the transfer of the ‘house’ asset in to your ownership is simply made conditional in the database that tracks those transactions. The blockchain ledger awaits the contribution of 2 pieces of information (variables) and passes ownership when they are provided.
You could enter your passport ID into the government website which authenticates (validates) it, passing a ‘yes this person is who they say they are’ flag to the blockchain. Then ‘somehow’ the money for the asking price is put in to the account of the house owner, which triggers a ‘I have the money for the house’ flag to be transmitted to the ledger. Both criteria being met, the blockchain then transfers ownership of the house. No expensive lawyers, Estate Agents or Banks have been involved. No professional service fees have been paid. The same activities have been performed and they’ve been done by reputable bodies which makes everything just as safe, but, nevertheless, you now own the home you wanted to buy.
Bringing it all together
‘FinTech’ (Financial Technology) startups are already challenging the big banks with new Blockchain ideas. New blockchain based services are being developed every day. At some point soon, at least one standard will be agreed for blockchains and, at that time, start-ups will be developed to start to build smart contract facilities.
The banks we’ve used for a long time have a great deal to worry about. They will have to generate the revenues they have relied upon for years, in ways other than simply being a trusted body to track transactions. All of that can now be done elsewhere – using Blockchain based Smart Contracts.