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July 21, 2022

Validity Labs AG

What is a smart contract?

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Smart contracts are programs that can own, hold, execute logic upon and transfer financial assets such as currencies, stocks and bonds.

Conventional financial systems have a fundamental assumption: Money is always transferred between individual people and companies. For instance in the SEPA system, each IBAN number is always owned by a legal person or an organisation. This assumption has served us well for centuries, but has been recently broken with the deployment of smart contract technology in the Ethereum platform.

Ethereum is a software platform enabling a third major party in the movement of financial assets: Executions of Programs. People can send money to executions of programs. When certain programmer-defined conditions are met; executions of programs can transfer money to an organisation, person or another program.

Another property of smart contracts is the lack of an owner. If you run image-manipulate code on Instagram, the execution of the program takes place on servers owned by Facebook. They can arbitrarily shut down execution of the code or replace it with another. Facebook can thus be seen as the owner of the execution of the image manipulation program. In contrast, smart contracts are executed on thousands of computers spread across the world — and therefore do not have a single owner. This property is very valuable when dealing with financial computation as smart contracts can truly be impartial to all parties utilising them for financial transactions.

Why are smart contracts useful?

Smart contracts are a vehicle for a radical re-imagination of current financial, legal and internet software systems. Many conventional financial and legal instruments such as futures, options, derivatives, letters of credit, contracts for purchase, business rules of a company and others are expressible as smart contracts. The cost of creating and deploying smart contracts can be much lower than the cost of maintaining conventional instruments of trade. These properties enable developers to build smart contract based e-commerce systems, reputation systems, gambling platforms, smart contract enabled organisations, currencies, central banks, banks etc.

The potential use-cases of smart contracts are immensely large. We have only scratched the surface of this amazing technology. A wide vista of business and career opportunities await people who can use this new medium to solve consumer and business problems.

What can I build with smart contracts?

Smart contracts can be used to build e-commerce systems, reputation systems, gambling platforms, smart contract enabled organisations, currencies, central banks, physical commodity depository businesses, prediction markets etc. Creative entrepreneurs are building next-generation businesses such as:

  • MakerDAO— A central bank that creates its own price stable cryptocurrency called Dai
  • Colony — A platform enabling people to build complete organisations with business rules enforced by smart contracts

    Applications of this technology is limited only by your imagination. What shall you build?
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