Tech Primer: What are Smart Contracts?

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” #Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a  contract, or that make a contractual clause unnecessary.  Smart contracts usually also have a user interface and often emulate the logic of contractual clauses.” – Wikipedia

Smart contracts seem to be all the rage right now, and there have been quite a few posts about them on Twitter, LinkedIn, and in the blogosphere recently.

So… what are they?

You have more than likely experienced a smart contract within the last 12 hours, either personally or as an unknowing (or knowing) participant: Digital Rights Management as an example, whether for music or movies; Hotel room key usage; Online gambling (I hope not); Mobile data usage and overage charges; Book/ship arrangements for service payments. The list goes on and on.

More commonly, today, you are likely seeing these terms floating next to the words #Bitcoin, Codius, or #Ethereum (who has been in the news of late due to a hack), or #blockchain. None of these are required to have a smart contract, but they are likely culprits for increasing the buzz-wordiness of the concept.

Smart contracts basically boil down to this (simplified) explanation: Two people, or entities, decide on an arrangement that can be both digitally validated and enforced. A trusted electronic system monitors the validation point(s) and when a criteria has been met, the system enforces the arrangement. Here’s an overly-simple example:

  • You want to rent a movie on DVD.
  • You swipe your credit card at a kiosk.
  • Your card is approved and rental funds are moved into the DVD owner’s account.
  • Upon receiving the funds, the movie is released from the mechanism and you may take it.
  • If you fail to return the movie within a time limit, you are billed the cost of the DVD.
  • Attempts to rent another movie while you have another rented are rejected.
  • Returning the movie — or a purchase transaction — frees you to rent another DVD.

The smart contract says you are welcome to rent the movie as long as you pay a fee and agree to be charged for a purchase if you fail to return it. The mechanism of enforcement is built into the lock/holding mechanism and the trusted system (you do trust your movie vendor, right?)

The example above is a physical implementation of DRM, the same process could be illustrated for digital locks on Pay Per View movies or downloadable content such as text-books or streaming music. The same IF THEN ELSE rules apply: IF something happens THEN do this, ELSE do this other thing.

  • IF it’s the first of the month THEN pay the rent
  • IF I am thirsty AND it’s 6pm on Friday THEN beer, ELSE water
  • IF VALUE(MyStock) < $5 THEN BUY(MyStock) ELSE SELL(MyStock)

The Contract is Smart as long as the criteria can be electronically validated in some way that both parties trust and the enforcement can be done electronically and automatically.

The key to why you’re seeing more and more talk about Smart Contracts is the interest in several frameworks and systems that are being built. Bitcoin and Ethereum, or Barclay’s use of R3’s Corda platform being prime examples of some of those systems.

That’s it, Smart Contracts in a nutshell.

** Tech Primers are meant to be brief and to the point, they are by no means comprehensive. Want to learn more? A good book, your local technologist, Google, and/or Wikipedia are all great resources! ** 

[linkedinbadge URL=”https://www.linkedin.com/in/jerrygilreath” connections=”off” mode=”icon” liname=”Jerry Gilreath”] is IT executive at RagingWire Data Centers.