What is a Smart Contract?
A “Smart Contract” or a “Smart Transaction” is a computer program that helps you to make secure transactions based on a predefined set of agreements, like a traditional contract. Its purpose is to reduce transactional friction, reduce paperwork, minimize the uncertainty of payments and overall make it easier for parties to transact electronically. A smart contract also makes the transaction more secure and lower cost and can be compared to a legal self-service. It is important to note that smart contracts do not replace the need for lawyers or accountants. We are human, and sometimes we need assistance to interpret and understand, and overall communicate with one another. However, a good lawyer will see the benefit of using a smart contract as a simpler, quicker, and cheaper way to transact.
Let’s say that Ingvar is selling his shares to Emil. Emil cannot pay the full amount until in 4 weeks (expiration date), but he wants to be sure that Ingvar does not sell them to someone else in the meantime. At the same time, Ingvar doesn’t want to hand over the shares to Emil before he can pay. They decide to use a Smart Contract.
- They decide on the sales price and number of shares to be sold.
- They decide on an expiry date for the contract of 4 weeks.
- Ingvar gives the smart contract control over his shares. There are two potential outcomes for this deal . . .
✅ If Emil pays before the expiration date, then the smart contract delivers the shares to Emil
🚫 If Emil fails to pay, the Smart contract returns the shares to Ingvar.
Very simple, quick and easy…