What are Smart Contracts? - Identity Review | Global Tech Think Tank - Identity Review | Global Tech Think Tank

Typically, when a consumer purchases a good from a company, they entrust that the company will follow through on the terms of the transaction for a variety of reasons—notably, financial, brand-related and legal. With the rise of recent online services, however, we’ve seen the pitfalls of allowing companies to dictate and change these terms as they please.

One example of such terms is from Venmo. According to its 27 page agreement, Venmo has complete control to freeze anyone’s account. To make matters worse, companies like Venmo often have ambiguous terms—“we may, at our discretion, impose limits on the amount of transactions you conduct through the Venmo Services,” positioning users in a vulnerable, liable position.

That’s where smart contracts come in.

How Smart Contracts Distribute Power

Smart contracts are pieces of code stored on distributed computers, or the blockchain, that execute when a set of conditions are met. Unlike centralized companies, the code isn’t controlled by one single entity; instead, the code is replicated across many different computers and is therefore more transparent, immutable and less prone to manipulation by any single entity.

One Harvard article states that smart contracts could decrease the time buyers take to pay sellers, as “a smart contract could immediately trigger requests for the required approvals and, once obtained, immediately transfer funds from the buyer to the seller.” As the smart contract is replicated across multiple computers (or nodes) controlled by entities with varying interests, both the buyer and seller can be assured no central authority interferes with their transaction.

Smart contracts could limit fraud, for instance, by automatically executing transactions based on insurance terms. In addition, smart contracts could transform the financial world, from implementing mortgage clauses, executing trades on the stock market and even performing financial transactions for the government. 

Potential Limitations of Smart Contracts

Smart contracts do pose their own unique drawbacks. Before the code on a smart contract can execute, a transaction fee must be paid. This fee is often referred to as a gas fee; on the Ethereum network, it’s paid using the Ether cryptocurrency. Other networks, such as the Solana network, are optimized for different use cases and utilize different tokens for their transactions. Exorbitant gas fees limit the scalability of such networks. Travis Hoium discusses how “high-enough gas fees will push projects to lower-cost networks… if the price of gas falls, it would likely be an indicator that transaction volume is down because users are moving transactions elsewhere.”

Additionally, a deregulated network inherently exposes itself to abuse. If no central entity controls or moderates the blockchain, the networks can easily be exploited for illegal activities. According to researchers Sean Foley, Jonathan Karlsen and Tālis Putniņš, around 46% of Bitcoin transactions between January 2009 and April 2017 were for illegal activity.

While smart contracts currently face some limitations, the potential to disrupt centralized conglomerates is too large to ignore. Already, recent developments such as DAOs, Ethereum staking and new blockchains with lower gas fees are solving some of the issues previously discussed by creating communities around the blockchain and significantly decreasing the cost of gas fees. The future of tech is decentralized—and more controlled by individuals.


Jibran Khalil is a computer scientist and entrepreneur from the University of Texas at Austin. He is a Tech Innovation Fellow at Identity Review and creator of My Workout Group, an iOS app that uses social accountability to help people workout. 

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