A smart contract is a piece of software that executes under specific real world conditions, much like a regular paper contract. However, it does not require any overhead that goes into a physical contract in its creation or execution.
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Smart Contracts and Transactions
When a client makes a financial transaction, he or she can do it digitally, without the need for an intermediary. Such smart contracts can be simple transactions that take place between individuals, or complicated, multi-party transactions involving many participants.
Imagine for example, that you want to rent an office space for a specific amount of time. This involves a contractual relationship. You pay a certain amount of money in exchange for the right to use the office space for a certain amount of time. This requires parameters, a set of rules that allow you to use the resource.
Typically with pen and paper contracts you would sit down with the owner of the space and a lawyer and create a set of terms that allow you to access the property. The owner would then give you a physical key. This takes both time and money.
A smart contract designed for the same transaction would work more efficiently. Instead of having to physically meet someone and discuss terms, you can browse the available spaces and choose a contractual terms that you like. Those terms would then be coded into the smart contract.
The smart contract will automatically verify your funds, transfer the appropriate amount to the owner of the space and then transfer a digital key to you, giving you access to the property. There will be no uncertainty in the way the contract works, no delays, and potentially no legal fees - creating an efficient, lean and cost effective transnational landscape.
Smart Contracts and more complex transactions
Smart Contracts are not limited to simple financial transactions like the above mentioned, but also for complicated, multi-party transactions like Syndicated Loans.
A syndicated loan is a loan between a group of lenders (typically banks) and a single party. Syndicated loans are complex and require a lot of verification in both the disbursement of funds and the subsequent repayment. As many parties are involved, they require authorisation across multiple organisations.
This requires a lot of paperwork that typically goes through a central clearing house, which results in overhead, lost time and high costs. Smart contracts can eliminate the delays associated with such complex transactions by codifying behaviours and also heavily reducing costs by avoiding paperwork and time consuming interactions associated with verifying details.
Since I had a contract, I would not need a central clearing house. Each participant in the contract would have to sign off on any disbursements and monitor the progress of the loan. I have a phone call or paying a visit to the accounting department.
That's surely a future worth getting excited about.