What Are Smart Contracts?

Did you know the idea of smart contracts predates Bitcoin by about 12 years? They were first mentioned in 1997 in a paper by computer programmer, Nick Szabo. But they only really took off in 2014. Today, they are revolutionising many industries from shipping to insurance.

First, let’s break down what a smart contract is. A smart contract is simply a self-executing contract. They are stored on a blockchain and programmed to run when predetermined conditions are met. Every smart contract executed on the Ethereum blockchain needs gas. Gas is a fraction of an Ethereum token and is used by the contract to pay the miners securing that transaction on the blockchain for their efforts.

Smart contracts eliminate the need for a central authority or intermediaries, thereby reducing costs and streamlining processes.

The blockchain is perfect for smart contracts because it’s immutable and secure meaning there’s no risk of manipulation or human error. Sounds pretty cool, right? But is anyone actually using them in the real world? 

Let’s start with De Beers Group, the world’s leading diamond company. Diamonds are one of the world’s most precious stones but their provenance is a huge source of ethical contention with many coming from war-torn countries or those with opaque mining practices.

To fight this, De Beers uses a blockchain-based project called Tracr, which aims to improve the supply and logistics of diamond production. Tracr verifies a diamond’s lifespan from discovery to retail by recreating a digital fingerprint for the diamond, a non-fungible token or NFT.

It does this first by scanning the diamond to collect all the data connected to the diamond so that it can recreate it digitally. Tracr then registers this information which is stored on a blockchain ledger in the case of Tracr, this is Ethereum.

This is then shared securely across the network so any changes to ownership and new data can be added and verified using the smart contract which is programmed into the blockchain. This verifies its authenticity and ensures it has been sustainably produced.

For collectors, it offers an insight into the rarity of gemstones by being able to trace their every movement.

Let’s look at a less obvious example, like your teeth. Connected devices are a hugely complimentary technology in the use of smart contracts automating the sending of data that can then trigger conditions.

And one dental benefits provider is doing just that. Beam Dental gives their customers a connected toothbrush which shares data with an app. How often you brush your teeth, how well, and so forth.

This then adjusts premium rates according to predetermined conditions set out in the smart contract. Essentially, the more you take care of your dental hygiene the lower premiums you pay for your dental insurance. Win win! 

Flight delays are another area smart contracts are having an impact. If your flight is delayed for more than a specific period of time a blockchain-based application could source this information from the airline and automatically transfer a refund to you and the affected passengers. This saves on a number of costs and also provides a much better customer experience.

Insurance giant AXA used to have a Fizzy flight delay smart contract platform that did just this. Launched in September 2017 it was one of the first mainstream commercial uses of technology. Fizzy was based on the Ethereum blockchain and allowed customers to gain automatic flight delay payments via a self-executing element in the insurance policy.

Fizzy actually shut down this year although AXA said they were now looking at other automated payout products. So there you have it. Smart contracts have the ability to make all of our lives so much easier by personalising policies and automatically executing payments triggered by specific events. Are you using smart contracts? What’s your favourite application?