Smart Contracts: What Makes Them Smart and Why Should I Care?

Today, we'll explore one of the fundamental concepts in the world of blockchains and, by extension, one of the fundamental concepts in the broader realm of cryptocurrency and digital assets - Smart Contracts. Like most people, I prefer my contract to be smart… in fact, a brilliant contract would be even better! But seriously, what exactly is a Smart Contract? Where did they come from? Why are they so important to the industry at large?

Who needs the Mother of Dragons when we already have the Father of Smart Contracts?

Like so many of the other topics featured in our "Rational Exuberance" series, the invention of the Smart Contract does not trace back to the emergence of Bitcoin or Ethereum but instead can be traced back 25 years. Nick Szabo, an individual that no doubt will one day be considered the founding father] of the Cryptocurrency universe, takes credit for the development of both the concept of and much of the digital technology associated with what we now refer to as Smart Contracts. This makes sense when you consider that Szabo has an extensive background in both computer science and law. Not only did Szabo develop the Smart Contract, but he was an early pioneer of an alternative currency - BitGold - that preceded the development of Bitcoin by many years. This may explain why so many in the industry suspect Szabo of actually being the mysterious Satoshi Nakamoto, the inventor of Bitcoin itself.

So, what exactly is a Smart Contract you ask?

Great question. Well, in 1996, Szabo himself described the Smart Contract as being "a set of promises, specified in digital form, including protocols, within which the parties perform on these promises." In essence, he created the notion of a computer algorithm or code that would ensure that this "set of promises" could be performed without human intervention, enforcement or subjective influence. It's probably worth noting at this point that there are some industry observers and pundits that would say Smart Contracts are actually dumb contracts… but that's for another Rational Exuberance. Anyway, Smart Contracts are not a big deal in the industry… they're a massive deal.

What are Smart Contracts for?

Aside from being at the very core of the creation of Ethereum, the second-largest cryptocurrency in the world, Smart Contracts have an almost infinite number of applications to our daily lives and the ever-expanding digital universe. Smart Contracts have strong "use cases" in various areas, ranging from digital records (voter registration, passports, etc.), supply chain management, invoice reconciliation, the insurance industry (life, health, automobile, property and casualty), medical research, mortgages and land title. For those of you who have ever participated in a real estate transaction and wondered, "Why do I need to pay for an attorney who does nothing more than showing me where to sign on form after form of legally binding documents that I have no time to read?" Well, the closing attorney and other supporting businesses are about to go the way of the dinosaur… extinct! And it's all thanks to our good friend Nick Szabo and the creation of Smart Contracts!

As always, whether or not you are crossing the digital divide with Rubicon Crypto, please remember to do so with common sense…and with Rational Exuberance!