Smart contracts for beginners

Published by yoditaricxc3 2 Sep 2019

Smart contracts for beginners


In the universe of the blockchain there are multiple technological advances that will be impacting our daily life earlier than we think. One of them is smart contracts, which have been widely used for initial offers of currencies (ICO), but their use and possibilities are much broader.

But what are smart contracts?

The CriptoNoticias (2017) communication medium gives us a simple definition in this regard: "... they are contracts that have the capacity to be fulfilled automatically once the parties have agreed to the terms". This implies that the present contracts have a way of operating different from the traditional ones that we already know based on a signed paper. Of course, both agree that the parties agree to comply with what is set out in them on the subject of the contract (product or service), which must be a just, true and lawful cause. However, "... both differ in three factors: the mode of writing, its legal implication and the mode of compliance" (ibidem, 2017).

Traditional contracts on paper imply, first, to set the terms and conditions on the part of the parties involved based on a common agreement; second, sign this agreement and finally, have a legal backing that allows these parties to have a trusted third party to monitor compliance with the rules, so that no one violates the provisions of the contract thus damaging one of the parties.

Smart contracts, on the other hand, are computer programs that are written in virtual code, not in a human language or natural language. They are based on software programmed to execute and complete a series of tasks according to previously established instructions. Of course, this forces the parties to comply with the agreement without the use of trusted intermediaries such as notaries, since the computer code is responsible for fulfilling this function. In this way the action time is reduced, possible errors and the costs involved are avoided.

However, to ensure that neither party can manipulate the software to change the terms of the contract in its favor, all intelligent contracts are registered in a chain of blocks or blockchain. This implies that the information written in computer code is encrypted and, therefore, is immutable, which offers autonomy, security and confidence to those involved, and therefore, obliges them to comply with the conditions and terms.

Aha! And the disadvantages?

Of course, all this technology is in its initial stages, so intelligent contracts are susceptible to errors or obstacles, such as the immutability of the blockchain, which means that if there was a programming error or any of the parties can not comply with what was agreed upon by a personal or other incident, there will be no way to correct, modify, postpone or cancel what was agreed by any of the parties. There could even be theft of funds by third parties as a hacker. All this is looking to correct itself through possible editable blockchain. Finally, there is not yet a legal framework in any country in the world that endorses the use of these intelligent contracts given that they are in the stage of study, testing and development. There are some cases of specific use during the trial period in the United States, for example.

Now, how does this work in real life for the parties to comply with the agreement when there are property titles and money involved?

A very simple example we have in the acquisition of a property:
"Let's say that María wants to buy Pedro's house on credit, paying a certain amount of monthly fees. Then Pedro and she use some platform of intelligent contracts ... to schedule the contract with the established terms. Among them, that Maria will pay X amount before a certain date each month ... and that Pedro will irrevocably cede the property title registered in the chain of blocks to Maria when the agreed amount is reached. Then the intelligent contract will act, without intermediaries, and will carry out exactly those instructions, literally, without Maria or Pedro being able to intervene "(CriptoNoticias, 2017).

As we can see, this is something quick and simple, so smart contracts can be applied to: a) payment automation (scheduling the sending of a quantity of money in a specific time that must be delivered to one of the parties; loans, etc.); b) registration and change of ownership (fix the ownership of a property and the change of ownership); c) energy transactions (based on the exchange of energy between individuals and organizations with the ability to customize the consumption of each client); d) intellectual property (facilitate the distribution of income when the rights of a product or service are shared); e) insurance (automate payment processes for incidents); f) bets (meet the payment terms without trusted third parties); g) automatic purchases (purchase of products or services at a fixed price for a specific time); i) elections (registering and verifying government or other elections), among others.

As we can see, smart contracts are an alternative that offers ample possibilities for a future that knocks at our doors and invites us to join a more and more digitalized world: cyberculture and the fourth industrial revolution. Surely they will be of common use in the next years for the multiple benefits that they generate to the companies and governments, or by the facility, speed of use and consultation, like by the saving in expenses.


CriptoNoticias (2017). ¿Qué son los contratos inteligentes? Criptonoticias. Link:

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