While interviewing Dave Birch of Consult Hyperion for a recent podcast on blockchain technology, DerivSource asked for an explanation of smart contract in the context of blockchain technology. Here is the explanation, according to Dave Birch.
The term smart contract isn’t entirely accurate according to many people because they are not really smart, nor are they really contracts. To explain, the essence of a smart contract is the idea that you can bundle up data with instructions together in a unit, such as a bitcoin, so when you are ready to act you can transfer value from one place to another. Imagine a situation where you are sent something of value but you are not able to use it until certain conditions are met; conditions could be for instance, you are not allowed to use the value sent until after a specific date, or unless you receive something else or two people have signed it.
In short, you can attach these conditions, but those instructions are carried out on the blockchain itself, not by people outside the blockchain. Use of such a mechanism may be useful in certain scenarios. Of course the lawyers say, and I agree with them, this can only be done between parties if there is a real contract outside of this arrangement. But we can certainly add some efficiency into the system by saying here is some commodity, or something of value, but you can only have it when conditions are met. For example, now some people talking about escrow-type contracts and delivery contracts which could be executed wholly on the blockchain without the need for people to get involved at all. Smart contracts, in my opinion are an interesting area for us to explore going forward.
For more information on blockchain technology, please listen to the podcast “Unlinking Blockchain from Bitcoin“.
