So, what is a smart contract? The quick 101

While blockchain technology has brought digital currencies such as bitcoin, ethereum, dash, ripple etc. to life, it has also enabled the use of smart contracts in a secure, transparent and immutable way – so what is a smart contract and how does it work?

While some blockchain networks have been designed to perform simple transactions, others have evolved to perform more complex procedures. These procedures are stored as code on the blockchain, and this code outlines certain conditions that once met by the parties using the contract, will execute a set of actions also defined in the code. These conditions and actions stored as code on a blockchain network is what is known as a smart contract.

What differentiates smart contracts from any other conditional automation tool is that, firstly, the code resides on the blockchain network, which means it inherits the security and immutability of the distributed ledger and, secondly, the code can control blockchain assets (store or transfer cryptocurrency).

So, let’s illustrate how you would use a smart contract in a real-world scenario: renting out an apartment:

Renting out a property today	Using smart contracts
Retain lawyer to create a rental contract	Create a smart contract on a blockchain rental platform to meet your conditions or reuse existing contracts
List your property to be rented
Screen possible renters (ask for documentation such as payslips, bank account statements, identification documents)	Renters apply are screened automatically based on smart contract conditions (e.g. wallet balance) and renter history (if available)
Present rental contract, await signed contract and initial security deposit	Pick best renter and deposit is automatically deducted from renter’s digital wallet
Monitor monthly rental deposits and charge back utility costs (based on meter readings and municipal accounts) for the duration of rental contract	Monthly rent automatically deducted from digital wallet with monthly utility costs (smart devices provide input to smart contract), all transactions recorded on the blockchain
Take legal action if needed for late payment or contract breach (e.g. damage to property)	Late or conditional violations automatically flagged (possibly on smart contract platform) and sent to landlord or third-party to take legal action
Contract is concluded and security deposit is manually deposited back to renter (pending any costs not paid or damaged property fixed)	Deposit is automatically returned to renter’s digital wallet (pending smart contract conditions and flags marked as addressed) by contract termination date

While this is a highly narrow flow of events, the scenario is meant to illustrate the use and power of smart contracts.

A hot topic surrounding smart contracts is whether they are legally binding. Many countries have made advances regarding the legal acceptability of electronic contracts, which are expected to inform smart contract precedence. Some do feel that the decentralized nature of the technology could be the Achilles’ heel of its enforceability because there may not be a centralized authority to decide on disputes

(For further reading on the legal dimension of smart contracts, I would recommend Norton Rose Fulbright and R3’s white paper: ‘Can smart contracts be legally binding contracts?’)