Introduction to Smart Contracts

Smart contracts are a new up and coming way for artificial intelligence, machine learning, blockchain, cryptocurrencies, and many other revolutionary tech systems to be used.  As you may have guessed by reading AI and machine learning, smart contracts are a new way to automate and expedite a certain process. In the case of smart contracts, they are programmed to automatically execute actions according to the terms of a contract. Some have described the smart contract programming system as an “if-then” system.

For example, a vending machine is a great way to visualize a smart contract. The agreement of a vending machine is simple: a customer inserts a certain amount of money which then automatically prompts the machine to ask the customer what they want from the machine. The customer selects their item and then the machine automatically provides the customer with that item along with any spare change. The vending machine acts as a smart contract by automatically executing the actions of the agreement between the machine and the customer.

Before we go into large-scale examples, it is important to understand the relationship between fiat currencies and cryptocurrencies as well as blockchain. Cryptocurrencies are like any other currency in that the value against other currencies fluctuate, and they can also be traded for other fiat currencies. Blockchain can be thought of as simply a store of information including electronic ledgers for cryptocurrencies, databases, and many other types of information.

Now we can expand the vending machine example to larger, more complex issues. An example of when a smart contract can be useful is in the purchase of a house, apartment, or any other living quarters. In the traditional case, someone would have to bid for the property, make a down payment by making out a check that takes time to clear, work with a lawyer to validate the property, and many other steps that go into purchasing a property. If that property were uploaded to a blockchain, then all of those processes could be automated.

There would be no need to work with a lawyer because the property’s information and documentation are all on a blockchain database. A check would not need to clear because cryptocurrencies can be traded in real-time for fiat currency, and the payment could be made immediately. This same process can be repeated for all kinds of transactions including automobiles, rent, etc.
To show some real-world applications and results of smart contracts, we can look at some real-world data. We mentioned how smart contracts could affect mortgages and mortgage markets, but it is important to look at actual results. Since smart contracts have become more prevalent in the mortgage industry, customers have experienced a $480-$960 reduction in processing fees per loan.

Fortunately, this is not a zero-sum game; banks have experienced a reduction in operating cost between $3-$11 billion per year in the US and EU. This can even be expanded into insurance markets. Customers have seen insurance premiums on motor insurance decline by $45-$90 per year, while insurance companies saw a reduction in $21 billion in settlement costs. It is exciting to look forward to how smart contracts will continue to affect these markets and many more.

Smart contracts have the potential to improve efficiency in many markets which currently operate slowly. It is important to keep an eye out for how smart contracts may affect global industries, trade, cryptocurrencies, and many other facets of the global economy.