The days of mainstream customer service middlemen services are slowly but surely coming to a screeching halt, due to the creative destruction process from innovative smart contracts. Since the beginning of time, the relationships between a business and its customers have been built on trust. Customers trust that products and services are provided as marketed and that businesses will act morally correct if anything goes wrong. Businesses also trust that customers will act honestly and not try to claim fraudulent transactions, refunds, or discounts. When that trust is broken between the two parties, contracts are what they fall back on. Contracts define what’s expected of each party, and the consequences if one participant doesn’t hold up their end of the agreement. Even though contracts aim at ensuring mutual accountability, executing the terms is often expensive and time-consuming, due to the fact that third parties are often needed to avoid scenarios where both parties blame each other for a wrongdoing. Smart contracts provide a simple and much more cost efficient solution to these annoying circumstances. In this article I will break down in simple terms what smart contracts are, how they can easily solve trust issues in the place of expensive third parties across different industries, and how I see this technology playing a role in our future.
While it may seem as if smart contracts just came onto the scene with the advent of blockchain technology, that’s not actually the case. Nick Szabo, the computer scientist who was the first to describe the concept in 1996 (he also coined the phrase), defined them as: “Computerised transaction protocols that execute the terms of a contract. The general objectives are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimise exceptions both malicious and accidental, and minimise the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs.” Nearly 20 years later, the technology Nick had envisioned was brought to life. The programmable contracts combine procedures of advanced contract law with the protocols used in online commerce, allowing them to be easily implemented on the distributed ledger systems that we call blockchains.
Let’s cover exactly what a smart contract is. Essentially, smart contracts are blocks of code that can self-execute certain programmable functions, with certain parameters, when predefined criteria are met. They are activated, usually, by someone sending a transaction to their address on a blockchain. As of now, they are being utilized primarily on the network called Ethereum but can also be utilized on Tezos, Tron, IOTA, EOS, and Cardano, though they have different characteristics on each platform. To boil smart contract use cases down to simple terms, they do 3 things; they store rules, they verify rules, then they self execute those rules.
To clearly explain how smart contracts work, let’s compare them to a vending machine, using the 3 things they do that I described above. Vending machines are programmed (stored rules) to take your money (cash or coins). After you’ve entered your cash, the machine uses its internal detection algorithm to determine if your money is real or fake (rules being verified). Assuming your money is real, you then press a button then vola, your selected product is then dispersed for you to enjoy (rules being self executed). Also be aware of the fact that if you put in too much money it will give you back the correct amount of change.
While this vending machine example is very simple, this is the essence of how smart contracts work. We don’t give vending machines a lot of praise because the transactions they process are really small and insignificant. It’s a matter of a few dollars to get a drink or a snack. But now think about if the products inside the vending machine were thousands or millions of dollars, how would your perspective change? Now imagine that the vending machine is digital, instead of a physical object that runs on a blockchain that promises to run a certain set of functions upon receiving funds. Now that you understand how smart contracts work, let’s discuss how they can shake up a few customer service middlemen industries.
Given that smart contracts are self-executing contracts, the parties involved never have to worry about trusting each other in order to adhere to the terms of the smart contract. They also won’t have to worry about turning to lawyers to seek reparation if conditions are broken. In the event of a violation or disagreement, smart contracts automatically trigger the settlement agreed by all parties. With these defenses in place, customer service becomes a more consistent and much smoother process, where disputes are settled much faster and with a lot less headache.
Let’s imagine what it would look like if smart contracts were in place when purchasing real estate, which is a long and grueling process. In a traditional purchase, you put down a bid on the house, then you go about getting the ownership papers. Now you have to verify that those ownership papers are legitimate, which means you have to hire a lawyer to check all of his/her boxes and make sure there aren’t any liens on the house. You also have to get a mortgage and proceed to sign a bunch of paperwork. If this process was done via smart contract, everything can be uploaded regarding the house with the ownership confirmed making sure there aren’t any liens against the house, and how much of the mortgage is left if you accept it etc.. With this in place, you could just put down your deposit, which would trigger the smart contract to open up all needed information regarding the house for you to see and verify. Then you wouldn't need a lawyer or any other third party verification, you could just make your purchase in real time. Also, if you were a seller and you put your house on a smart contract, you wouldn't need to pay a real estate agent a percentage of the sale.
This same process can be applied to buying a car online. Normally you find a car online that you like, then you go to the dealership to haggle over a price. After that you go to a bank to get a guaranteed check so that you can take it back to the dealership to have it cleared. After that, you sign all of the paperwork for the ownership and title of the car before you can drive it off the lot. If this process were on a smart contract, all information regarding the car (ownership, price, condition, pictures, etc.) could be uploaded on the blockchain. With this in place, you would just have to sign all the required documents and pay the required price so that you can buy the car in real time.
Smart contracts have the potential to disrupt the insurance industry, financial services (loan and mortgage initiation, etc.), the legal industry, renting services and products and much much more. However, as with anything good comes risks. Let’s list the pros and cons of smart contracts and discuss the cons since we’ve already dived into the pros. The pros regarding smart contracts are that they are fully automated, they have deterministic results, they’re trustless, fast, precise, secure, cost efficient, and fully transparent. The cons surrounding smart contracts are that they can have software bugs, protocol changes (depending on the platform hosting them), unclear regulation, and unclear taxes. The good thing regarding all of the listed cons is that they can all be solved.
Smart contracts are an extremely promising technology but are still in its infancy stages. Despite having a lot of potential, they can still be prone to problems. For instance, the code that makes up the contract has to be perfect and contain no bugs. This can lead to mistakes and, sometimes, to such bugs being exploited by scammers, as was the case with The DAOsaster, where money put into a smart account with a mistake that resulted in 3.6 million Ether tokens being stolen worth $50 Million at the time.
In my opinion, all of these problems exist purely because of how young smart contracts are as a technology. With such promise, the technology will definitely be perfected over time. Without a doubt, smart contracts are about to become an essential in the fabric of our society, especially as we keep heading towards tokenizing/digitizing everything and moving towards a cashless society. As usual, I’ll end this article with one of my favorite quotes as it pertains to this subject, “Accomplish more with less. Constraints breed resourcefulness, self-sufficiency, and invention. There are no extra points for growing headcount, budget size, or fixed expense.”