Preamble: most people following the cryptocurrency news will have heard the term “smart contracts” floating around. And things like “Ethereum is best for smart contracts”. And in case that just sounds like words, this post may help.
First, An Infographic of Smart Contracts
An Example of a Smart Lease Agreement
Here are some steps to renting a house:
- Find a house;
- Sign a lease agreement;
- Pay the deposit;
- Fetch the keys;
- Move in;
- Pay rent for the duration of the lease agreement;
- Move out;
- Get the refund deposited.
Now there are some risks involved here. The landlord has to trust that you’ll continue to pay rent every month. And the tenant has to trust that they’ll receive the keys after paying the deposit; and that they’ll get their refund deposited when they leave.
That is: there is risk, which can only be mitigated by “trust” between the Landlord and Tenant (and threats of court dates).
But let’s say that, instead of keys, there is an electronic passcode to access the premises. Well now someone can draft a smart contract on Ethereum:
- Find a house;
- Sign a smart lease agreement on Ethereum, to be settled in Ether;
- The tenant pays the deposit in Ether;
- The landlord uploads the passcode by a specific date;
- If the landlord doesn’t upload the passcode, the smart contract automatically issues the refund to the tenant;
- The tenant pays rent in Ether;
- If the tenant doesn’t pay rent, the smart contract automatically withdraws the passcode, and locks the tenant out;
- And the deposit refund is governed by the smart contract as well.
The terms of the smart contract are enforced by the network.
That is: you can outsource the “trust” in the contract to the decentralised network.
Which feels very neat.
That said, full disclaimer: I’m almost certain that a real smart contract programmer is going to tell me how wrong this technical detail all is. But I think that the general idea is about right.
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.