Smart contracts are blockchain-based algorithms that execute when specific criteria are met. Simply put, smart contracts are contractual agreements between two or more parties on the blockchain.
Most of the time, they are used to automating how a deal is carried out so that everyone can be sure it is done immediately without needing a middleman or extra time. A smart contract can also automate a workflow so that the next step is taken automatically when certain conditions are met and checked.
Generally, a smart contract differs from a traditional one because smart contracts are self-executing and enforce contractual terms using blockchain technology. However, before the contract is executed in smart contract code stored within the blockchain, the parties negotiate and agree on its terms.
Benefits of Smart Contract
Trust and transparency
Parties to a smart contract need not worry about whether information has been altered for one person’s gain because no third party is involved, and participants exchange encrypted records of transactions.
Speed, efficiency, and accuracy
A smart contract executes a contract immediately after a condition is satisfied, which makes it very efficient. Furthermore, smart contracts are digital and automated, so there is no paperwork to complete or time spent fixing mistakes frequently occurring when documents are manually filled.
Security
Smart contracts are more secure than traditional contracts because blockchain transaction logs are encrypted, making them incredibly difficult to hack. Additionally, hackers would need to alter the entire chain to change a single record on a distributed ledger because each record is linked to the documents that came before and after it.
Savings
Smart contracts eliminate the need for intermediaries to conduct transactions, along with the costs and time delays that go along with them.
How Does Smart Contract work?
Assuming Lynda is a realtor, Cathy approaches her to sell her a property. If Lynda agrees to sell the property, here is how a smart contract works: “When Carthy pays Lynda 1500 Ether, THEN Carthy will receive ownership of the property.” After this smart contract is established, either party cannot alter it. Thus, Cathy can feel secure in paying Lynda 1500 Ether for the property.
Without a smart warranty, Lynda and Cathy would be forced to spend more fees on third parties, including the bank and an attorney. So, smart contracts automatically carry out the contract as soon as the terms of the agreement are met. Accordingly, the following steps explain how a smart contract works;
- Parties to the proposed contract collaborate with developers to determine the preconditions that the smart contract with respond to.
- The developers then develop and test the logic using an intelligent contract-writing platform. The application is then sent to a different team for security testing after it has been written.
- The next step is to engage an internal expert or company specializing in evaluating smart contract security.
- After approval by the expert, the contract is put into use on an already-existing blockchain or other distributed ledger.
- Once the smart contract has been implemented, it is designed to wait for event updates from an “oracle,” a source of encrypted streaming data.
- Immediately the smart contract receives from one or more oracles the required combination of events needed to work; the contract is executed.
Can you Enforce a Smart contract?
There are questions about whether smart contracts can be enforced because of how they differ from traditional paper contracts. But as a general rule, smart contracts are enforceable as long as they include the most important parts of a contract. The following are the elements of a valid contract:
- Offer: When a party offers to exchange one thing for another thing of value, they are making an offer. Typically, the contract’s terms are the offer.
- Acceptance: Acceptance occurs when an offer is accepted. It is a crucial element that guarantees contracts are made with explicit acknowledgment, agreement, and acceptance.
- Consideration: This is the reward each party receives for upholding their end of the bargain. Though payment is most frequently the form of consideration, anything of worth can also be used. Interestingly, consideration can be a right, an interest, or a benefit.
- Legal Capacity: The parties to a contract must be legally capable of entering into a contract.
Where any of these elements are missing from a smart contract, such contracts are not enforceable. Even if all of these things are in place, a smart contract can’t make people agree to terms that can’t be enforced by law. For instance, requesting parties to forego legal rights will probably render that element of the agreement invalid. So, smart contracts are legally binding as long as they have all the parts of a contract.
Legal Challenges of smart contracts
As mentioned earlier, once the smart contract is created, it runs automatically and cannot be changed. These facts present some intriguing difficulties, especially in the case of disagreements or enforceability. Here are some of the legal issues that smart contracts may raise:
- Difficult to modify a smart contract: Once a smart contract is in effect, it is nearly impossible to alter the preconditions of the contract. The only way to modify the contract is to cancel and execute a new one. Hence, it is advisable to have a backup copy of the code.
- Automatic Enforcement: Execution is automatic in a smart contract, even when parties cannot uphold the provisions. Consequently, stopping unauthorized enforcement in a smart contract is challenging and may result in difficulty in remedying unlawful enforcement.
- Disputes Resolution: Both parties must be clear on settling disputes upfront because it might be challenging to change a smart contract once it’s been implemented. Accordingly, the agreement must be viewed as irreversible from the outset, so parties must exercise extreme caution so that disputes do not occur. The permanency of the contract and its automated execution could make it challenging to make adjustments if a dispute does arise.
Conclusion
In conclusion, a smart contract is a great innovation over traditional contracts. However, those who sign these contracts will need to change their way of thinking from one based on how flexible paper contracts are to one more results-based.
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