2. Smart contracts

Down to basics

In 2014, several years after the mysterious Satoshi Nakamoto introduced blockchain, a group of innovators came up with the concept of blockchain-based ‘smart contracts’. They developed a programming language that enables people to code computer programs capable of carrying out the terms of agreement between parties, without the need for human coordination or intervention (Buterin, 2015). At its core, smart contracts are ‘if/when…then…’ statements that automatically execute actions (such as value transfer) when the predetermined conditions are met. Storing such contracts on a blockchain makes them transparent, traceable and immutable. Thus, reinforcing participants’ trust in the validity of the contract, and reducing the need for intermediaries, arbitration costs, fraud losses and time.

This innovation has opened up a whole new array of possibilities and applications for blockchain technology. Now, anyone wishing to create a trustworthy, quick and self-executing program can develop their own decentralised application (or DApp). Smart contracts are also fundamental building blocks for other blockchain concepts, such as NFTs, which will be introduced in the following chapters.

Down the rabbit hole

The following are just a few examples of what smart contracts can potentially enable for nature conservation:

  1. Quick and automated compensations for human-wildlife conflicts

Some of the biggest challenges to human-wildlife conflict compensation schemes are their lack of accessibility, non-efficient claims assessment mechanisms, and lengthy processing times from loss to compensation, all of which may lead to retaliation towards wildlife. Smart-contracts-based assessment systems could enable local communities to instantly gain compensation for proved losses. Similarly, smart contracts may be utilised to improve other micropayment schemes for biodiversity conservation.

  1. Accessible climate insurance for smallholder farmers

Smallholder farmers are especially vulnerable to climate change due to their reliance on weather for yield, making the basis of their livelihoods, and main sources of food, precarious. Although such risks may be mitigated by conventional climate insurance, in certain parts of the world such insurance is either too expensive or non-existent. Providing local farmers with decentralised, accessible, smart-contracts-based climate insurance could potentially automate claim assessments and provide an economically viable model for both farmers and the insurer.

  1. Automated carbon credit issuance

Common challenges in scaling carbon credit markets include lack of trust in credit certifiers and verification methods, double-spending of carbon credits (selling the same carbon credit to more than one buyer), cross-border regulation, high verification costs, and the overall accessibility and complexity of credit issuance. Smart contracts could introduce both trust and automation to these processes. For example, they can be programmed to process remote-sensing data to verify carbon sequestration without human intervention, thus disintermediating certifiers and ensuring credits’ trustworthiness, while reducing conservation costs and time. Programming a smart contract to enable only one sale per credit enables overcoming double spending issues. Furthermore, smart contracts can be custom programmed to create either a common global standard for credits or multiple context-tailored standards for different regions. Overall this may enable a more efficient and trustworthy mechanism for credits in conservation projects.

  1. Incentivising conservation through accessible micro loans

Microfinance lending can contribute to the conservation and sustainable use of biodiversity, while supporting income generation and vulnerability reduction in local communities. However, such schemes are often limited by factors like geographic location, participants’ access to traditional banking services, and trust between parties. Decentralised Finance (DeFi), enabled by smart contracts, may allow the establishment of automated, accessible, cost-effective and trusted micro-loan schemes to encourage conservation-friendly practices regardless of geographic location or traditional banking status.

  1. Smart-contract-bound devices

Further down the rabbit hole, new applications are emerging that enable control of physical devices  though  smart-contracts. This may enable a future in which, for instance, fishing equipment cannot be physically operated unless smart contracts verify a vessel’s location, thus introducing new enforcement measures and helping reduce fishing in prohibited areas.

What’s out there?

1. Cambridge Centre for Carbon Credits (4C) is aiming to utilise smart contracts to feed satellite and other remote-sensing data into the blockchain to automatically issue trustworthy and exchangeable carbon credits to landowners.

2. The Lemonade Crypto Climate Coalition aims to utilise smart contracts to help protect vulnerable communities from climate change, through an accessible and automated weather micro-insurance system.

3. GainForest is developing a smart-contracts-based platform to incentivise local communities to perform conservation-friendly practices. Compensation for communities is automatically unlocked once pre-agreed conditions (such as forest cover percentage) are met.

Things to keep in mind

Interested in smart contracts? Here are some points to consider.

1. All considerations under the ‘Keep in mind’ section in the Blockchain and Web 3.0 chapter.

2. What types of smart contracts does your chosen blockchain support, and which programming language knowledge is required to develop those contracts?

3. Can conditions that should be met according to the contract be fed into the blockchain automatically or without a human intervention (for example, via satellite imagery, weather sensors, or similar) so that trust is not compromised?

4. If human intervention is still needed, try to design a contract in which trust is least compromised by a person feeding data into the blockchain.

5. Investigate blockchain oracles – entities that connect blockchains to external systems, thereby enabling smart contracts to execute based on inputs and outputs from the real world.

6. Whilst mitigating unintended consequences of your application, consider best practices for co-designing the smart contracts with any stakeholders who may use or be affected by it in the future.

7. Once deployed on a blockchain, smart contracts are intentionally difficult to change. Make sure to consider and simulate every possible scenario, breach or flaw in the code prior to its deployment, and consider the need for post-execution dispute resolution mechanisms.

8. If you want the smart contracts to be legally binding, seek legal advice. While smart contracts often contain agreements between parties that emulate a traditional legal contract, in certain jurisdictions they are not yet considered legally binding (though they will still self-execute).

9. Test before implementing. Rigorously test your decentralised application before it has any real-world influence on nature and people.

Further resources