The age of Smart Contracts

What happens if someone comes up with a new paradigm for charities to get paid immediately for work carried out? What happens if funders and commissioners can be satisfied that funding allocations go directly to where they have the most benefit? What happens if everyone can see the flow of payment and delivery of services in real time? Maybe we are about to adopt a new paradigm in how we contract in the third sector - the age of Smart Contracts.

I say new, but smart contracts in their various forms, are not new. In 1994, Nick Szabo defined a smart contract as:

'a computerized transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs'. This definition could also be applied to common law and so we are still to this day searching for a commonly understood definition of what sits under a smart contract versus what is simply a contract.

Since 2015, Bill and Melinda Gates have been delivering work through digital platforms and pioneers with large pockets and large ambitions will test methods of delivery which improve efficiency and reduce waste of effort, time and money.

The UK government has supported the common understanding of definitions and regulatory frameworks in which blockchain and smart contracts exist in guides such as the Distributed Ledger Technology document produced in 2015 which dates the beginning of Bitcoin cryptocurrency trading and a distributed ledger back to 2008.

Definitions of smart contracts differ depending on your sources, and there seem to be no regulatory frameworks per se outside of general law, however, smart contracts may be characterised by:

• being designed by the minimum number of parties
• self-executing and self-verifying
• autonomous and transparent, increasing competitiveness for donors and those delivering work
• automating contract conditions
• mitigating security concerns and managing risk
• reducing third party involvement, time and costs.

The benefits from using smart contracts might be clearer once we live in a hyper connected world with benefit of learning from pioneers, however, it is easy to see how a donor might prefer to donate in a currency which is passed immediately to a group working in a particular community as they deliver their activity, rather than sitting with a third party administrative body who inevitably reduce the value and speed of the investment. Whilst there have been some security issues, for example around bugging of code, the transparent nature of smart contracts might indicate that security issues can be visible and dealt with quickly.

But what does all this mean for the third sector? CAF have done some excellent thinking on what impact this new technology might have for the sector and the Big Lottery Fund have recently launched a digital fund, which I'm hoping someone will translate some of this great thinking into action!

Blockchain and the cryptocurrencies which are traded go hand in hand, but what I think is going on with much less herald, but with a lot more potential, is the work on smart contracts. A downturn in public trust of charities following some recent unforgivable behaviours plus a new way to give in an open and transparent way could just equal a marriage made in heaven! Hopefully through some brave thinking from donors and funders and some brave work from charities will show that collaborative efforts in smart contracting bring benefits to all.