What Are Smart Contracts?
Smart contracts are an exciting new frontier for technology, business and law. It has the potential to usher in a wave of innovation and serve as a building block for a next chapter of the internet.
The concept of a smart contract is to formally encode the conditions and outcomes of a legal agreement into a computer program. Rather than rely on another party to enforce the terms of the arrangement, the obligations of a smart contract are settled automatically and autonomously through the execution of its code.
The benefits of using smart contracts instead of traditional contracts are increased speed, efficiency and trust that the contract will be executed exactly as agreed.
Most proposals for smart contracts depend on independent entities to inform contracts about the state of the outside world. Bitcoin contracts rely on “oracles” to attest to facts from the outside world by introducing signatures into the network if, and only if, specific conditions are met.
For instance, the smart contract for a will would need to know whether or not someone had died.
Such a system typically requires the smart contract code to be executed on the consensus network itself. But encoding advanced logic and executing untrusted code, is complicated to integrate. Until now, this has been one of the primary obstacles for creating a viable smart contract system.
Smart oracles take the concept of oracles a step further by placing the untrusted code execution in the oracles’ hands. Smart oracles then, are trusted or semi-trusted entities that can both provide information about the outside world; and execute the code to which the contracting parties agreed.
By decoupling the execution of untrusted code from the consensus databases and other services that track and transfer asset ownership, smart contracts can be achieved without increasing the complexity of existing consensus networks like Bitcoin and Ripple.
Without being tied to any single consensus network, contracts created using smart oracles can interact with multiple networks at once as well as virtually any type of online service. This means that a single smart contract could interact with Bitcoin and Ripple, web-based services like PayPal, Google, EBay, or even other Internet protocols, such as SSH, LDAP, SMTP and XMPP.
Smart contracts hold the potential to empower people to build a fairer, more affordable and efficient legal system; and smart oracles are one of the simplest ways to realize that dream.
Potential use cases include bridges between value networks, escrow, cryptocurrency wallet controls, auctions for digital assets, derivatives, debt and equity, smart property and voting.
Since the system is extensible, the functionality will continue to expand as the ecosystem develops.