Technology is refining and redefining the way businesses operate nowadays. From streamlining their internal processes to reaching out to customers and collaborating with partners, technology has a huge role to play. Now, if we focus on collaborating with partners, vendors, shareholders, etc., contract formation comes into the picture.
However, with the rise of technology, it is the smart contracts that are changing the contract management process completely. This is the reason business owners who are not technically skilled are looking to opt for contract drafting services from firms that excel in technology.
Defining a Smart Contract
A smart contract is termed as a computer code that makes monitoring, executing, and enforcing a legal agreement automatically. On the blockchain, functional outcomes and contractual clauses are mapped. The best part about these automatic contracts is the fact that they help reduce the transaction prices and dependencies on the performance of the other party.
An essential smart contract feature is the imposing of retroactive alteration by blockchain, making it final and unmodifiable. Also, an automatic transaction cannot be rolled back or reversed, and this at times leads to complexities when a certain task executed under the original contract is required to be stated void.
What Makes a Smart Contract Smart?
Unlike a traditional legal contract, a smart contract is not just limited to defining rules but also controls the transfer of currency/asset since it is transmitted into a program “and the program runs this code and at some point, it automatically validates a condition and it automatically determines whether the asset should go to one person or back to the other person, or whether it should be immediately refunded to the person who sent it or some combination thereof,” said Buterin, a speaker at the latest DC Blockchain Summit that was held in Washington, D.C.
At the same summit, Jeff Garzik, co-founder of Bloq, a startup providing blockchain services stated, “Smart contracts guarantee a very, very specific set of outcomes. There’s never any confusion, and there’s never any need for litigation. It’s simply a very limited, computer-guaranteed set of outcomes.”
Traditional Contract vs. Smart Contract
- It is formed after discussing terms and conditions, negotiations physically.
- It can be in written or electronic form.
- It is not self-executing.
- It requires a middleman to ensure the authenticity of contract execution.
- With a contingent contract (a part of the traditional contract), there is room for future uncertainties and changes in terms/transactions.
- It is formed after discussing terms and conditions, negotiations digitally.
- It can only be in an electronic form.
- It is self-executing.
- It is not dependent on any middleman and gets executed once terms and conditions are fulfilled.
- It demands solid clarity of terms since once finalized, it leads to transaction processing, which is irreversible.
Where Can You Use Smart Contracts?
It is a known fact that not everyone goes out to vote owing to the inconveniences associated with standing in queues, proving your identity, completing forms, and more. Smart contracts can help resolve these issues through ledger-protected votes that ensure voting authenticity and great convenience since voters can cast their vote from their homes itself.
The blockchain technology in smart contracts ensures transparency and accuracy through an automated system. Ideally, business operations get delayed due to multiple approvals back-and-forth, but with a blockchain ledger, this process gets streamlined easily. Also, it helps avoid discrepancies that lead to lawsuits that demand time and money.
- Supply Chain
Similar to management issues, supply chains too are dependent on multiple approvals that increase unwanted exposures to fraud and loss. Such exposures are eliminated completely through the blockchain technology that provides an accessible, secure digital version to the concerned parties and automates processes and payments.
- Automobile Insurance
E contracts can be used in self-parking or self-autonomous vehicles in a way that helps in detecting the faulty person in a crash; the driver, sensor, or any other thing. With the help of smart contracts, an insurance company dealing in automobile coverage comes in a position to charge different rates based on the location and circumstances under which people operate their vehicles.
- Real Estate
A typical real-estate contract involves paying to a middleman or a newspaper for advertising for renting out your apartment. However, with a blockchain ledger, such costs can be brought down significantly since all you need to do is pay using bitcoin and encode your rent contract on the blockchain ledger. Now, everyone can see it, and you can achieve automatic fulfillment easily. People like hard money lenders, real estate agents, brokers can benefit from it at large.
Personal health records hold immense importance in the healthcare industry. Using blockchain technology, these records can be easily encoded and stored using a private key with restricted access. Using this strategy, research compliance with HIPAA laws (in a confidential and secure manner) can be ensured. Apart from this, a blockchain ledger can support healthcare management by taking care of healthcare supplies’ management, supervising drugs, testing results, regulation compliance, and more.
Smart Contracts’ Pros
- Autonomy: No need to depend on a lawyer, broker, or other intermediaries for the formation and execution of a contract.
- Speed: Through task automation in smart contracts, a lot of time and effort is saved against manual document processing.
- Cost-Saving: Since smart contracts do not involve any middleman, you get to save a lot throughout contract formation and management.
- Trust: Trust never gets lost in smart contracts since a shared ledger is used to encrypt documents that can never be lost.
- Backup: Everything related to your smart contract has a backup in place, assuring you of 100% safety.
- Security: Through cryptography, your documents remain safe against any kind of hacking attack since it is almost impossible to break this code.
- Accuracy: Smart contracts are not just cheaper and faster but highly accurate also since there is no manual filling involved.
Smart Contracts’ Cons
- Technology Expenses: Although smart contracts eliminate the cost of middlemen, incorporating the use of blockchain technology comes with its very own cost.
- Lack of Technical Expertise: Not every person is technically skilled to understand the codes involved in blockchain and may make a wrong decision based on the advice of others. Hence, it is mandatory to provide a contract management glossary to understand the technical terms prior to contract signing.
- Irreversible Damage: If the code encrypted is not correct, it will lead to an irreversible damage and serious consequences.
- Unemployment: Undoubtedly, when artificial intelligence takes over the skills and role of humans, unemployment will be on the rise.
- Partially Legal: In a lot of states, smart contracts are either partially or not at all enforceable in the court of law.
We hope by now, you have understood what smart contracts are and why more and more businesses are looking forward to using them for contract drafting. There is no denying it comes with certain negatives also, but it is the case with every technology.
If you look at any technology of the past or present, it comes with its own set of positives and negatives. It all depends upon the person and his requirements, along with his faith in using a specific technology. In the case of smart contracts, it definitely appears to be a boon than bane and this is the reason it is fast becoming a top choice amongst the providers of contract drafting services.
Carol Cline writes about law office management, contract management, technology, and business law. She is passionate about teaching lawyers and legal professionals on how to renew their strategies and use technology in their cases and does so regularly for her clients at Cogneesol.