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The Rise of Smart Contracts

Posted 11 July 2017 The Rise of Smart Contracts
Written by Jon Gulson
Contracts in the conventional sense are the basis for a relationship between those involved in an agreement or undertaking. 

Just as cryptocurrency removes the bank in a financial transaction, the smart contract disintermediates conventional arrangements through the application of self-executing logic on a blockchain. 

The aim is to guarantee a specific set of outcomes without need for litigation, the benefits being twofold: reduced costs and reduced risk of contractual breach or dispute.

Smart contracts have become a ubiquitous feature in ICO crowdsales, a popular new investment which have exploded in 2017. As outlined in our recent blog, this blockchain based software has the potential to be a catalyst for the new growth paradigm.

The Origins of Smart Contracts

The origins of smart contracts can be found in the cypherpunk movement in the closing decades of the last century.

Nick Szabo the creator of bitgold (an unimplemented forerunner to bitcoin) first developed the idea in 1994 with the intention of conflating contract law with digital commercial protocols on the internet.

Smart Contracts Evolve on the Ethereum Blockchain

Smart contracts have since evolved to include general purpose computation, but allowing for transparency without a middleman.



Most smart contracts are written on the Ethereum blockchain, with the Ether token paying for the computing power required. This explains the inexorable price rise of Ether over the last year. 

The pricing mechanism for Ethereum is also known as ‘gas’, denominations of which include a Szabo, Finney and Wei (references to early activists in the cypherpunk community).

The reason smart contracts don’t run on the bitcoin blockchain, is it uses a non-Turing complete scripting system. Things change constantly in this space however and Rootstock (RSK) are looking to provide the missing technical links which make smart contracts bitcoin compatible.

Are Smart Contracts Legally Binding?

Problems with smart contracts can arise with enforceability, particularly where they run on a permissionless blockchain. Smart contracts perform according to code, irrespective of whether a central authority would uphold them.
Other questions include jurisdiction and whether the contractual terms in smart contracts are comprehensive enough? Conventional contracts have built up around the importance of words, in a world where relationships can be complex.

Where a traditional court may rescind a contract, a smart contract will run regardless.

Uses of Smart Contracts

The rise of smart contracts can be explained in an age moving toward automation and artificial intelligence: smart cars are being developed, we already use smart phones and Google have developed smart glasses. Smart contracts are an extension of this.

The ICO market which has built up around smart contracts, is in early days. This means we can speculate about future use cases; but they have the potential to save time and costs in a range of sectors including finance, health care and real estate.

This is why ICO’s will proliferate and why those looking to benefit from this new technology, should pay close attention.

Written by Jon Gulson
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