You’ve probably heard the term smart contracts by now, especially given how the crypto scene has been booming this year. Most people think smart contracts are a new innovation and there is even talk of them replacing real lawyers. Is that possible? What are smart contracts and how do they work? Today we’re going to answer these questions.

What are Smart Contracts?

Let’s start by understanding smart contracts. Even though the term implies something “smart” going on behind the scenes – that’s far from the case. As a matter of fact, “smart contracts” have been around for a long time and you’ve been using them without realizing.

A contract, at a basic level, denotes an agreement or an understanding of terms which regulate an exchange between two parties.

When you buy land from someone, you have a contract them over the size, price and other details. These contracts are drafted by lawyers and upheld by courts – that’s how it works. But then there are other contracts you make and utilize in the course of your daily life, such as using a vending machine.

Trustless Contracts

A vending machine that is operational implies an agreement where if you enter money into it, it releases a product for you. There is no complicated contract here, but the principle is the same. You don’t just walk over to a vending machine and wonder whether it is going to hold its end of the bargain. You look at it, and you see the pack of chips or can of coke displayed – the machine has the item you want, it is guaranteed (and if no coke or chips come out of it, you don’t take it court, you complain and it gets fixed).

In essence, it is a fairly basic but trustless contract. By trustless we mean you don’t need to involve middlemen or lawyers into the transaction and this is why it is efficient, takes seconds to execute and there are no disputes or trials.

Applying Trustless Contracts on a Large Scale

Now consider the case where you buy digital assets online, such as domains and websites. One of the most popular services is Flippa, and the reason is because they act as mediators between sellers and buyers.

When you’re buying a domain, you are spending thousands of dollars at times – how do you know if the person selling the domain even has it? How do you know that person is reliable and will transfer the domain once you pay? These are problems solved by Flippa because they are considered a “trusted” party in this transaction – both the buyer and seller trust them with their money and assets respectively.

Lawyers play a similar role in large transactions such as purchases of land and shares in companies. It’s a good system because it protects both parties, but it is hardly efficient, not to mention costly (lawyers charge a pretty penny and services such as Flippa charge commissions).

Wouldn’t it be great if we could have a system somewhat like the vending machine agreement where we could have trustless transactions at scales bigger than junk food and coke cans? Well, that’s what smart contracts are here to do. They basically change any transaction into a vending machine like arrangement where both parties are protected by a coded contract.

How do Smart Contracts work?

The premise behind smart contracts is very simple – they work on an If – Then basis. A very simplified example of a smart contract code where I point my domain to your DNS for an agreed amount would be something like this:

> if DNS ===

> then spend contract balance

> else refund buyer

When we agree to this transaction, we create a smart contract on a blockchain, such as Ethereum (which is the most powerful one with excellent coding flexibility) and the best thing about it would be that this smart contract would be immutable and literally set in stone as it goes on the blockchain.

On the blockchain, this contract will be verifiable publicly, removing any element of fraud or doubt and with it, the need for any trust-based escrow service.

The moment I fulfill my end of the bargain, the smart contract will release the contracted amount of Eth into my wallet, and everyone is happy with this trustless arrangement.

Of course this is just a simplified example and there are tons of possibilities when it comes to coding smart contracts.

Can Smart Contracts replace lawyers?

This seems to be a popular question and the answer is both yes and no. The reality is that smart contracts are not perfect at all. They only work well in perfect conditions where there is no dispute as to the quality or context of the agreement. Going back to our vending machine agreement – a pack of chips is a pack of chips and a can of coke is just that. You know what to expect and very rarely do you get surprises.

However, consider a land purchase where you may get a deed or title, but the title itself is forged, or the land in question has been designated as government property – the smart contract will execute as soon as the condition is met, but you will still end up having to go to court to contest the sale.

Lawyers will be needed until we can automate every aspect of our business and financial dealings. That being said, if a lawyer is simply churning out template contracts and supplying forms for various processes, a smart contract could easily replace him or her by furnishing the required documents as soon as a transaction is made.

So yes, lawyers who were simply pushing papers around are probably going to be replaced in the near future, but those who are actually practicing law are going to be in demand for the foreseeable future.

What do you guys think about smart contracts? I believe they’re going to make certain things very convenient, such as paying for Uber rides and trading digital goods. Leave a comment below and let us know your thoughts!