Smart contracts are increasingly being adopted in a range of industries, including government, management, insurance, real estate, supply chain, healthcare, and finance. These blockchain-based agreements or arrangements between two parties, such as businesses or individuals, can execute themselves autonomously, and have the potential to significantly enhance scalability and growth for organizations.
Nick Szabo first introduced the concept of smart contracts in the 1990s, however, it wasn’t until Ethereum paved the way in 2023 that they were able to become a reality. Recently, the momentum of this movement has been gaining traction. There are a number of advantages, however, there are also some drawbacks. Have you considered whether this is the best option for your business?
The Definition of “Smart Contracts”
Smart contracts offer an advantageous alternative to traditional contracts, as they are able to manage themselves autonomously. Smart contracts are agreements between two or more parties which, once accepted, come into effect and are executed automatically as long as the conditions and criteria within them are fulfilled.
In the insurance industry, a smart contract can facilitate the release of funds to an insured party once they provide the necessary evidence of an incident.
Smart contracts are stored on a distributed ledger, commonly known as a blockchain. This form of self-executing contract is immutable and operates within a distributed network, meaning no third-party intervention is required for the agreement to be carried out between the two parties involved.
When utilizing an approved technology, transactions executed via a smart contract are immutable and can be audited. This makes it easier to uphold the terms of the agreement in a consistent manner.
Five Advantages of Electronic Contracts
Safety
Due to the unchangeable nature of the blockchain, smart contract agreements are trusted to be upheld. As an additional security measure, the contracts can be monitored and are available for public viewing.
Quickness and Effectiveness
When discussing smart contracts, automation is essential. There is no need to dedicate a large amount of time to completing paperwork and ensuring everything is in order, as the agreement can be implemented immediately. Furthermore, no third-party supervision, authorization, or approval is necessary; all parties can proceed without delay.
When all conditions of the contract have been met, performance will commence immediately.
Reduced Expenditures
It is highly likely that you will benefit from cost savings by avoiding the need for a third party. This could reduce the legal fees, notary charges (as witnessing of the signature is not necessary) and other overheads. Smart contracts provide an alternative to traditional contracts which could help to save money. Payment is finalized once we have received your completed paperwork.
Preciseness
The initial coding of smart contracts is undertaken with the precise details of the agreement in mind. As a result, many organizations and individuals who have utilized smart contracts have found them to be reliable. The agreement’s stipulations are outlined in comprehensive detail from the outset. It is important to note that the agreement is recorded in an unalterable ledger on the blockchain, making the terms of the agreement both transparent and immutable.
Independence
Smart contracts bring many benefits and one of the greatest is the lack of need for a lawyer, notary, broker, or other middlemen to execute a transaction or agreement. This opens up a lot of freedom for both parties involved.
Due to their autonomous nature, these contracts are administered automatically by computers rather than humans, who may be prone to bias and inaccuracy.
There Are Four Issues with Smart Contracts.
There Is Flawed Software
It is of paramount importance that the codebase of a smart contract is of a high standard. As much of the code is open source, it is possible for changes to be made which could open up vulnerabilities that could be exploited by malicious actors.
It is true that smart contracts cannot be altered after they have been completed; however, this also means that any errors or flaws in the code at the heart of the contract will be permanently incorporated into the final version.
Concerns from a Legal Perspective
Smart contracts are a relatively new development in the history of legal systems, with limited monitoring and regulation. Without legal enforceability of the agreement’s details, there is potential for issues to arise further down the line.
It is essential to ascertain the legality of the smart contract and to identify any potential routes of exit for a party aggrieved by its terms. Moreover, ambiguities within the contract’s provisions must be addressed promptly.
Inability to Change Direction
Smart contracts cannot be altered after they have been created, so there is little scope for amendment. Therefore, all parties involved must take great care when constructing and encoding these contracts. This is beneficial for business, but it means that mistakes and ambiguities cannot be tolerated.
In Terms of Scalability
Scaling blockchain-based services, applications, and infrastructures has been a challenge for some time. Smart contracts may be effective for basic agreements, but when it comes to implementing them on a larger scale for more complex topics and agreements, this presents a significant challenge for large enterprises.
Blockchain technology has already had a significant impact on the commercial world in many areas. Smart contracts, which utilize such cutting-edge technology, offer the potential to revolutionize how businesses communicate and operate. This is not a gimmick; implementing such technologies can lead to greater productivity and cost savings.
Smart contracts have the potential to revolutionize commercial transactions, though they might not be suitable for every business. Companies need to consider their needs and objectives alongside the potential difficulties presented by smart contracts as they move forward.
