Smart Contracts

Smart Contracts

What is a contract?

It's a set of promises or terms agreed upon by people or groups of people.

Each of these promises might include; a value of something, a transaction, a variation between values, an action/product/service to be delivered and a time limit.

These mutually acceptable agreements allow people to cooperate and make deals, while protection for all parties is provided by the law, which acts as a trusted intermediary for securing the agreement.

In effect, contracts encode highly evolved human relationships.

What is a Smart Contract?

It's exactly the same as a regular contract but the terms are converted into code and then uploaded onto the Blockchain, which allows it to have more efficient functionality.

--- I'll expand the functions here ---

Once on the Blockchain both parties can interact with the Smart Contract.

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What are the Benefits of Smart Contracts?

They have the potential to be self enforceable, trustless, transparent, faster and cheaper than regular contracts.

Self enforceable - once the terms of the contract are agreed, they are encoded through an application and uploaded onto the Blockchain - now both parties can interact with the contract to fulfill their part of the agreement.

Trustless - now the contract exists as code and steps of logic, it does not require either party to know or actually trust each other as both parties will have agreed on the terms to maximize the opportunity for a good outcome and to protect against a loss outcome. - however, trust can be addressed through Reputation systems that provide Transparency and Consensus for the community

Faster - can be created through a Decentralised Application - ÐApp - without the need for lawyers.

Cheaper - they do not require legal teams or law specialists to create them - however under the present system a lawyer might be required to 'sign off' the contract - reduce the cost of creating, maintaing and securing our relationships

Transparency - both parties will be able to check each other's past behaviours on the blockchain and gauge their reputations

Reputation Systems - it will be possible to create a term in a Smart Contract which prevents anyone with a score of less than 6 to use it - thereby providing an extra layer of security to the process - as Reputation systems become more advanced on Ethereum, reputation capital will become a valuable commodity.

Smart Contracts in essence don't make anything possible that wasn't possible before. It's just cuts out the middleman and made the whole process much easier and efficient.

... which is better than...

The Present System Where contracts are written onto paper, which is passive, costly to copy, costly to enforce

• you need legal specialists and law teams to work the process
• it's difficult to see how the relationship between the parties and their past actions and behaviour
• you need to trust the lawyers knowledge of a specific area of law.
• all lawyers are not created equally

How will Smart Contracts be used?

Most contracts used throughout history are made up of similar clauses with variations only on specific values like dates, times, quantities etc... so there are only a limited number of contract terms and values that are used in any agreement.

Parties will be able to choose which terms and which values to use for their contract by using a template on a ÐApp where you fill in the blanks.

Example: [NAME A] promises to give [NAME B] a [OBJECT] by [TIME/DATE] in return for [VALUE $/BTC].

The contract might then have to be 'signed off' by a legal representative depending on your nationality or place of business then it will be uploaded to the Blockchain.

Ethereum acts as a distributed platform for running smart contracts. It will allow people to codify, secure and trade just about anything in a decentralised manner that will cut out the middleman.

On Kickstarter and most proprietary applications, the same basic code / contract terms are run again and again with the only variations being on 'project name', 'investor name', 'investor amount', 'reward'.

For these code/contract terms and some other auxillary services (user interface, community etc...) the porject owner has to pay about 20% of their investment fund to the company.

So a simple template contract that copies what these companies do, can easily be developed with a much smaller percentage to pay.

Vitalik's example of Kickstarter code is here. It is the business logic as simple and as efficient as possible.

What are the implications of Smart Contracts?

How will Smart Contracts be enforced?

Examples of Simple Contracts

Contracts all people know about:

• Tenancy Agreement - The Owner of a property agrees for a Tenant to use his apartment for [TIME] for [$/BTC VALUE] and can use a Smart Phone with the Airlock Ðapp to allow the Tenant access to the property for that period once the payment has been made.

• Employment Contract - Designer has to agreed to create a logo for a company by a [Date] for [$/BTC Value]

• Financial Instruments

  • ACTUS: Algorithic, Contract, Types, Unified, Standards
  • is a financial instrument reference database that represents all contacts which links changes in risk to cash flow obligations of financial contracts
  • only 30 financial contracts -

• Algorithmic

Article References Jarrad Hope - Amsterdam Ethereum Meetup 2014-03-04 - http://www.youtube.com/watch?v=AHAAktdxSOE