Last week, I wrote about the process of disintermediation and how it will disrupt banks and bankers. By encrypting transactions and distributing them across a peer-to-peer network, we will no longer need banks to serve as trusted intermediaries in financial transactions. We can eliminate the middleman.
Can we eliminate lawyers as well? You bethca.
We have lawyers for the same reasons that we have bankers: we don’t trust each other. I don’t trust that you’ll pay me; I want your bank to guarantee it. Similarly, I don’t trust that you’ll honor our contract; I want a lawyer to enforce it.
But what if we could create a contract that didn’t need a lawyer to interpret and execute it? We could eliminate the lawyer as an intermediary. That’s exactly the idea behind smart contracts (also known as self-enforcing or self-executing contracts).
First proposed by Nick Szabo back in 1993, smart contracts use software to ensure that agreements are properly executed. Not surprisingly, smart contracts use blockchain technologies spread across peer-to-peer networks. If you think that sounds like Bitcoin, you’re right. Indeed many people think that Szabo created Bitcoin using the pseudonym Satoshi Nakamoto.
So how do smart contracts work? Here’s how Josh Blatchford explains it:
“… imagine a red-widget factory receives an order from a new customer to produce 100 of a new type of blue widget. This requires the factory to invest in a new machine and they will only recoup this investment if the customer follows through on their order.
Instead of trusting the customer or hiring an expensive lawyer, the company could create a smart property with a self-executing contract. Such a contract might look like this: For every blue widget delivered, transfer price per item from the customer’s bank account to the factory’s bank account. Not only does this eliminate the need for a deposit or escrow — which places trust in a third party — the customer is protected from the factory under-delivering.”
Smart contracts, in other words, precisely define the conditions of an agreement — not unlike dumb contracts. They also execute the terms of the contract by automatically (and irrevocably) transferring assets as the contract is fulfilled.
Blatchford wrote his description in VentureBeat – an online magazine that helps venture capitalists identify and invest in leading edge technologies. This suggests that the money to fund smart contract platforms is already flowing.
Indeed, the first smart contract platform – Ethereum – launched in July 2015. Ethereum’s website describes the endeavor as “… a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.”
Ethereum seems to be essentially a developer’s platform today. Developers can use the platform to develop applications that eliminate the need for trusted (human) intermediaries. Should lawyers be worried? Not yet. But soon.