The development of smart contracts has directly led to offering investors security, speed and accuracy in a new way. It gives investors assurance that what they are investing in is trustworthy, key in a market like precious asset co-ownership, in which trust is an underpinning factor. Having grown out of the world of Blockchain, ‘smart contracts’ are ushering in a new age of legal agreements and are destined to become mainstream in legal practice.
Smart contracts are lines of computer script, which act very much like physical contracts with terms that must be met. Once the terms of an agreement are completed, the contract is automatically and immediately implemented by the blockchain.
As smart contracts are based on the blockchain, and so, live on the internet, they can execute transactions very quickly. Without the need for processing documents manually, contracts can be organised efficiently and across borders, thereby streamlining the whole transaction process and adding tremendous value to a functioning co-ownership economy.
As a legal document, contracts’ terms and outcomes must be explicit. Smart contracts allow no room for miscommunication or misinterpretation as one of their primary functions is to record all terms and conditions in explicit, immutable detail on the blockchain. Thus, they drastically cut down on time lost through, sometimes ambiguous, clauses and sentences. Smart contracts essentially help to avoid pitfalls of undefined conditions or events.
The importance of the Blockchain
Many smart contracts are written, including those at TEND, on the Ethereum blockchain. The Ethereum blockchain makes it easy to create arrangements tailored to specific requirements, and then store on the decentralised and independently verifiable public record.
A significant advantage over offline contracts is that smart contracts are self-executing computer code, all parties can be sure that they will be carried out, regardless of human involvement. This makes the system both highly efficient and trustworthy.
Blockchain gives a high degree of confidence in the agreements made. Stakeholders gain peace of mind as it is nigh on impossible to change or tamper with data, unnoticed. Critically, this means that users and partners can be assured that the contract will be carried out despite having not met the countersigner.
Co-ownership is a legal concept where more than one person shares the ownership of an object or asset. Smart contracts enable the so-called tokenization of such objects or assets, i.e. creating fractions thereof. Tokenisation is playing thus a key role in the next evolution of the sharing economy, opening up access to previously unattainable, precious and collectable assets to a vast audience. Only a few, exceptionally wealthy individuals can consider purchasing and maintaining a million dollar Aston Martin DB4 outright. But tokenise it so that 5 or 10 co-investors can share the outlay and suddenly it becomes a far more interesting and accessible investment. Smart contracts are offering an effective and repeatable solution for correctly executing a sale or purchase transaction in a co-ownership scenario.
Importantly, smart contracts significantly reduce the need for litigation should something go wrong. As they are self-executing, parties commit themselves to abide by the rules and determinations of the underlying code. This facilitates total transparency of the transaction and gives investors full peace of mind.
Growth of Co-ownership
The growing demand for co-ownership can also be attributed to a desire, particularly amongst the millennial generation for an asset-lite lifestyle with far great priority being given to life-enriching experiences. Sharing economy companies are enabling people to live this lifestyle while still investing in the precious assets they want to experience. Co-owning an asset rather than buying it outright can enable investors to enjoy a far wider range of opportunities and experiences. Why buy a villa in Mykonos outright when you can potentially have a quarter share in four properties across the globe (and likely use that Mykonos villa just as often!).
To sellers, removing the challenge of finding a single buyer through transforming into a co-ownership model can make a very expensive asset much more liquid. This model also allows owners to retain a share in the asset where maybe they have a long-standing emotional attachment. An attractive proposition to an enthusiast who might be seeking to liquidise an asset (or simply share their passion) whilst keeping a vested (though reduced) interest in.
The modern trend towards an experience-driven lifestyle has led to more people, especially younger people, becoming interested in investing in multiple co-ownerships rather than one single asset. This has led to a growing demand for co-ownership, of which smart contracts play a critical part in the secure and trustworthy execution. The rise of smart contracts is not only helping the co-ownership market to flourish but has also seen the advent of the sharing economy 2.0, where companies and individuals can reach agreements quickly and efficiently and trust those agreements to be immutably recorded.