Smart Contract Definition (For Beginners)

All of us have heard the term smart contract in technology commercials and discussions of emerging DeFi technology while wondering, just what exactly the term means. This blog will give a smart contract definition that beginners can easily understand moving forward.

A smart contract is the foundation for much of the technology in DeFi today. It can be distilled down to a transaction that is carried out between two known or anonymous parties with minimal outside influence. Transactions can be tracked and are permanent and irreversible.

If the concept is still hard to grasp, here’s an example of smart contract technology that we can all relate to:

Vending machines, the original smart contract

Vending Machines, an Early Example of Smart Contract Technology

Vending machines are an excellent example of the benefits of a smart contract. You want to grab a cold soda. You don’t have to go to the supermarket or the corner store if a vending machine is nearby. Simply put your money in and the product you want is dispensed. Simple enough, right?

Notice what is missing from this transaction. You didn’t have to give your money to any third party in order to get that soda. You didn’t have to enter a store. You didn’t have to drive anywhere. You didn’t have to spend time waiting in line. You got your product in the most simple and efficient way possible. We’re obviously ignoring the times when the vending machine doesn’t cooperate, but this too is eliminated since the contract is self-executing as the terms are written in lines of code.

File:Waiting in line at a food store.JPG

Now, look at it from the sellers perspective. The vending machine operator did not need to expend capital on a storefront or other ancillary costs (electricity, security, insurance, etc.). Nor did they need to hire anyone to execute the transaction properly. The vending machine dispenses the product to the customer with precision and efficiency with minimal external assistance (electricity and someone to keep the machine stocked).

While a smart contract definition is a must know for anyone new to the cryptosphere, it is a must that we examine how this technology has disrupted certain industries and will continue to do so moving forward. In cryptocurrencies, Ethereum gained marketshare not only as a store of value, but due to its blockchain allowing smart contract functionality. This was separated Ethereum from Bitcoin which was incapable of running smart contracts and decentralized applications. Recently, the Stacks protocol has enabled DeFi, decentralized apps and smart contracts on the Bitcoin blockchain enabling an explosion of Bitcoin secured NFT art projects.

Where the concept of a smart contract becomes incredibly powerful is when we consider applications for this technology where tremendous inefficiencies and outside influences exist. We’ve already seen this in the digital art sector, where NFT’s have caused massive disruption in the art world. Want to own a piece of digital art? You don’t need an exchange or a third party. Just purchase through your digital wallet and that piece of art is yours. In seconds. Ownership is absolutely provable, as record of the transaction is immutably recorded on a blockchain.

Obviously a prime example of this is the banking sector, where smart contract technology won’t just change the game, it will flip the entire game board over, scattering the pieces as far as you can imagine. We’ve already witnessed individuals sending large sums of money without the expense or excess time involved in an wire transfer, simply by sending cryptocurrency between digital wallets. The internet simplified and improved the process of applying for a traditional loan. Now what happens when you can access a loan in seconds without the need for a credit check? This is possible with smart contract technology.

Smart contracts will absolutely drop a nuclear bomb on the real estate industry. What happens when you can sell your home in a matter of minutes through an efficient, agreement between seller and purchaser. Think of all of the hurdles that a homebuyer must currently jump through. Now think of how those hurdles will be minimized through smart contracts. A brief example, this virtually eliminates the need for a real estate agent (and their commission) and many third parties will be removed from the process in order to execute a transaction.

Some Future Applications of Smart Contract Technology

Smart contracts open up the possibility of self-paying loans. What if you could receive a loan by putting up cryptocurrency as collateral, then receive your collateral back at the end of your term? Imagine not having to pay back usurious sums at crippling APR rates? Arkadiko finance (which we will discuss in-depth at a later date) is on the cutting edge of this application.

But this concept is being taken even further…

Conventional home loans require a sizable down payment, credit requirements and monthly payments that continue for decades. In the near future, it will be possible to purchase your own home through a self-paying loan, potentially similar to the Arkadiko example above. Theopetra RECT is pursuing this possibility eventuality right now. They seem to have captured first mover advantage and appear to be building, not for the quick and easy score, but with a long-term vision in mind. This is a powerful mindset that will allow them to capitalize on a concept that will not only cause a seismic shift in the real estate sector, but could transform the very way that we think about land ownership.

Please excuse the length of this post as it was intended to be a quick smart contract definition, but as you can see, the above examples will become massive trends moving forward. The result of smart contract technology won’t be ground breaking, it will truly be earth-shattering.

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