A smart contract is a software-based contract designed with a set of rules that can be defined and technologically supported by a set of security protocols. The smart contract is a security protocol that automatically executes once the conditions and obligations are fulfilled.
A smart contract is nothing similar to its physical paper-based counterpart. The term, smart contract, was introduced in 1994 when Nick Szabo, a law scholar, and computer scientist coined the term (Szabo 1994). With smart contracts, it is possible to remove the intermediary or intermediaries who traditionally maintain control over the contract process.
Nick Szabo articulates a smart contract is more akin to a vending machine than a piece of paper. Szabo says with a vending machine, you decide on what you want to purchase, click a button or enter a code, provide value for that item, and the machine will automatically release the item to you. Once all the inputs are received and the conditions are met the product is released automatically, this is a smart contract.
Smart contracts are designed to work in the same way as a vending machine, once certain conditions are met the contract can enforce ‘itself’ upon satisfaction of the conditions and ensure the contractual performance of both parties is fulfilled.
By combining smart contracts with blockchain, it becomes possible for a real estate transaction to become decentralized, completely removing intermediaries such as lawyers, title agencies, controllers, and government clerks. More importantly, Karamitsos et. al. (2018) indicates that blockchain will become the public ledger for real estate transactions and smart contracts will abolish the need for parties of the transaction to trust each other. After the contract is executed by the parties, it will be monitored by computers on the blockchain system with publicly available information. The contract itself will be public, however, the parties will remain anonymous. There is no need to trust any intermediary such as a lender, title company, or lawyer.
Smart contracts can also be drafted to allow for multiple party signatures. In the context of a residential home sale, it is conceivable to have several security tokens in place they are required to close the transaction. The Buyer and the Seller of the property will have their tokens, the Lender for both the Buyer and the Seller may have a token along with the property tax authority and potentially the real estate agent. Each party to the transaction would need to verify that they have fulfilled their obligation, the Buyer’s lender must provide the funds, the Seller’s lender must receive the funds and the property taxes and real estate fees must be paid which will fulfill the self-obligation of the smart contract to effectuate the transfer of land. While this may seem like a complicated piece of technology, blockchain technology has been used to facilitate multiple signature transactions with Bitcoin since 2012 (Davenport 2015).
As technology evolves, smart contracts will continue to improve upon their advantage of lower cost, increased efficiency, and fraud prevention improvements.
References:
Davenport, B., 2015. What is multi-sig and what can it do? Available at: https://www.coincenter.org/education/advanced-topics/multi-sig/ (Accessed 27 July 2020)
Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd EWCA Civ 265 (09 March 2012)
Husni, M., Ciptaningtyas, H.T., Hariadi, R.R., Sabilla, I.A. and Arifiani, S., 2019. Integrated smart door system in apartment room based on internet. TELKOMNIKA, 17(6), pp.2747-2754
Karamitsos, I., Papadaki, M., and Al Barghuthi, N.B., 2018. Design of the blockchain smart contract: A use case for real estate. Journal of Information Security, 9(3), pp.177-190.
Szabo, N., 1994. Smart contracts in Essays on Smart Contracts. Commercial Controls and Security.