Introduction - How can a contract be smart?
Ever eaten a Twix bar from a vending machine? You walk up, insert your cash, enter “E5” , and after some whirring, out pops a “fresh” Twix bar. Well, you just participated in the perfect analogy for a smart contract. When predetermined conditions were met, such as entering the correct amount of cash and entering “E5,” the program ran and produced the correlated outcome: the Twix bar.
While we could go on for hours about how the right Twix is better than the left, and anyone that disagrees wears Crocs unironically, we instead will use this time to break down how a smart contract works, why smart contracts are important, and our favorite topic: why apply them in real estate.
How a smart contract works
As previously mentioned and with further elaboration, a smart contract is an agreement between two or more entities written in computer code and executed when certain parameters are met. The resulting transaction is recorded on blockchain. Let’s look at a basic transaction between two individuals. Let’s say that the Elon Musk / Twitter debacle ended with Twitter agreeing to sell to Elon Musk for $100. Let’s look at the steps below for the execution of the smart contract:
- Elon Musk initiates the smart contract and signs for the transaction from the unique ID tied to his blockchain wallet
- The contract states in code that Elon will send Twitter $100 in return for Twitter signing over the rights to the social media platform (these rights are represented on-chain by a token)
- The transaction arrives at the distributed database, and Elon’s identity and funds are confirmed
- Then, Twitter sends the on-chain representation of ownership to the transaction’s unique address at the distributed database
- Twitter’s unique ID, identity, and token of ownership are confirmed
- The transaction (smart contract) now having received the funds, received the token of ownership, and confirmed the signatures / identities of each party executes
- Upon execution, Elon receives the token of ownership, Twitter receives the $100, and the transaction is forever recorded in the form of a new block on the blockchain
“But Alex, I don’t know of any smart contracts in the real world.” Well, buckle your seat belts and hold onto your diapers because if you have heard of Bitcoin, you have heard of a smart contract. Bitcoin, while referred to as a “cryptocurrency” or “token,” is actually a smart contract. Bitcoin’s contract is not much more than mappings of balances tied to the unique ID’s of individuals’ wallets. Put simpler, Bitcoin has written into its smart contract the finite amount of Bitcoin in existence; when you send a Bitcoin, in practice, the smart contract records the transaction as a decrease of “Bitcoin units” attributed to your wallet and an increase in the wallet you send the Bitcoin to.
Why this is important
Smart contracts are the ultimate tool in automation and efficiency. Today, corporations and third parties stand as the intermediary of transactions. These intermediaries typically take payment in the form of fees charged to you, the individual. Over the next day, I challenge you to look into every transaction you complete. You will soon realize the fees charged even upon the simplest of transactions, such as buying a pack of gum. Imagine if instead every transaction was executed flawlessly using a few simple lines of code. Fees, brokers, agents, credit card companies, and more would go away with a simple few lines of code. When implementing smart contracts, the transactions are transparent, recorded forever on blockchain, and settled in real time (typical processing time for banks, credit cards, etc. is around 1-5 business days, smart contracts occur in real time).
Applications in Real Estate
As we had discussed in a prior post, blockchain and smart contracts have the ability to transform the real estate industry. Every aspect of a real estate transaction is incredibly archaic in nature. Between brokers, lenders, title, and more, a simple transaction could end up costing you 10%+ of the purchase price in transaction costs.
A typical home purchase, and the associated process, has not changed. The homeowner lists the property, the buyer offers on the home, the homeowner accepts, inspections are performed, mortgages are applied for, and the house ultimately changes hands. Each of these steps can be coded into a smart contract, and once all of the parameters have been met for a transaction, the contract executes and records on the blockchain.
Conclusion
Smart contracts are exactly as they sound, smart. In transactions where you have wondered, “why is so and so here?” Or, “why do they collect a fee for pushing paperwork?” Smart contracts can mitigate against the fees that arise from the unnecessary third parties. We at mogul see a world in which smart contracts become commonplace. While you don’t need to know how to program them, knowledge of smart contracts helps you understand blockchain and why people call it a “revolutionary” technology.