What is a smart contract?

Published in El Pais, 22 December 2020.

Bitcoin is all over the news as after a rough 3 years it is at an all time high, coming close to $24,000 for the first time. It is not the only cryptocurrency to go up though, Ethereum, the second largest cryptocurrency by market value is roughly $650 a coin. The Ethereum blockchain has a lot of exciting features that can be revolutionary in so many different industries. The main of which is the Smart Contract.

The Smart Contract has all the parameters of a contract coded onto a blockchain (Ethereum being the most popular one) that only executes if all of the conditions have been met. What makes this so special is that it takes the most vulnerable part of any business transaction out of the equation, “trust”. Contracts of course lay out the parameters of a business agreement but at the end of the day, it is just a piece of paper. Seeking damages for breach of contract is a very timely and expensive process, one that causes many to cut their losses and walk away, and even if they do not, if the defendant does not have the money to pay you, might never collect. This is where the smart contract shines.

Let’s say for example you are a tech company in Bolivia wishing to purchase 100 computers from a Chinese company. You could create a smart contract with terms you both agree to buy the computers for 100 Ethereum, you can then send the Ethereum to the contract which will stay there until the Chinese company sends the computers to the shipping company, after which they are free to withdraw the Ethereum to their only wallet.

Now at this point your asking yourself, “I don’t want Ethereum I want money” and that of course is the biggest obstacle facing blockchain technology. Businesses and start ups around the world are working on ways to bridge fiat money with cryptocurrency, so that the Bolivian company can instantly convert Bolivianos to Ethereum while the Chinese company can withdraw Yuan from Ethereum.

The technology is close and soon we can have a new booming industry. It will be exciting to see how the world starts to take advantage of this technology.