What Will Smart Contracts Do to Alternative Investing?
One of the biggest concerns for alternative investors is the lack of transparency. After all, alternative investments are far less regulated than their conventional counterparts, and the combination of uniqueness and niche markets can make it quite difficult to track down a purchasing history. And if you can clear all those hurdles, you have to navigate the lengthy process of negotiating and signing a purchase contract and handover.
Smart contracts may be about to change the game.
Here’s a look at smart contracts, alternative investments, and how the two might synergize in the years ahead.
What are Smart Contracts?
A smart contract is simply a digital contract stored on blockchain which is automatically executed when certain conditions are met. Think of it as a computer program, because that’s exactly what it is.
The idea was first proposed in 1994 by an American computer scientist called Nick Szabo. Szabo was also the scientist who invented a digital currency called “Bit Gold” in 1998, a full ten years before Satoshi Nakamoto published the whitepaper that kicked off bitcoin.
According to Szabo, a smart contract was a computerized transaction protocol that executed terms of a contract. At the time, Szabo wanted to extend the functionality of point-of-sale systems into the digital world. To him, such contracts were the natural home of purely digital assets. Plus, such contracts allowed complex term structures for the sale and purchase of derivatives to be built into standardized contracts with low transaction costs.
How Smart Contracts Work
While we’re not yet at a point where smart contracts handle all digital transactions, the technology evolved closely along the lines of Szabo’s original idea.
In a smart contract, the terms of agreement between the buyer and seller are written directly into the contract code, with the terms and the code lines transcribed on blockchain. They operate using simple if/when statements, executed by a network of computers when the terms of the statements are met. Common conditions include things like releasing funds or signing a contract. For instance, if one party signs a contract, their funds will be released to the seller’s account. Because of this, involved parties must carefully negotiate the terms of the contract, including any potential exceptions and a framework for dispute resolution.
Once the terms are met, the contract executes itself automatically without any further input from either party, and the transaction details are permanently recorded in blockchain so that they cannot be altered.
Why Smart Contracts Could Be a Big Deal for Alternative Investing
Out of all blockchain technology hitting the market right now, smart contracts represent an exciting new direction for alternative investments.
Smart contracts may be applied in any area that touches contract law. Yet they also provide key advantages over traditional contracts, especially when applied to alternative investments. There is the convenience of using them, of course, but the biggest advantages of smart contracts cover two major concerns specific to alternative investments.
One of the major roadblocks for many alternative investors is transparency.
Because alternative markets are highly niche, you often have to broaden your buyer scope in order to find the right buyer. That can be a challenge in a global economic system where the rules of transparency aren’t consistent depending on where you are.
The whole point of a smart contract is to standardize and simplify. It doesn’t matter what contract law looks like on both sides—both parties have to agree to the exact terms of the contract, and then blockchain coding keeps both parties honest. That way, everyone knows exactly what’s expected and what they’re getting into.
Introducing a Trustless System
Much like the larger blockchain technology that smart contracts are built on, smart contracts introduce a trustless system—not a system without trust, but a system that does not require trust in order to operate successfully.
Take data, for example. When you’re examining a potential investment, data is everything—it tells you how an investment is performing, how it’s performed in the past, and whether it’s worth your hard-earned money. Blockchain and smart contracts introduce an environment where data cannot be lost, modified, or deleted. And that will dramatically improve results. In fact, Gartner predicts that organizations using smart contracts will see a 50% increase in overall data quality.
Are Smart Contracts for Alternative Investments Worth It?
With that in mind, smart contracts are not a substitute for due diligence. A smart contract keeps all involved parties honest based on the terms of the contract, but you have to do your homework on whether the other party is honest to begin with.
And as the Decentralized Autonomous Organization proves, smart contracts are not implicitly more trustworthy than traditional contracts.
That said, when you do your homework and use smart contracts correctly, they can be incredibly useful to introduce transparency into the world of alternative investing. And that’s a big deal for savvy alternative investors.
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When it comes to smart contracts, alternative investments could be a great fit to take advantage of the benefits smart contracts bring to the table. But first, you have to find alternative investments that are the right fit for your investment portfolio.
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