What is a smart contract? Do you know what a smart contract is? A smart contract is a set of self-executing instructions written in a computer code. Smart contracts are automated transactions that rely on blockchain technology. Thus, a smart contract is only as smart as the information it receives, it is not a “real” contract unless it incorporates the elements of a legally binding contract.
Smart contracts have a very promising future, as major financial institutions and banks have begun to invest in and develop blockchain technology and the use of smart contracts. Smart contracts have different attributes that will help the institutions that implement them such as:
- The use of digital signatures. The keys enable the authentication of the identities of the counterparties and the ownership of assets.
- Smart contracts can use oracle. Oracles enable a smart contract transaction to access or refer to outside information or events, such as weather information, interest rates, etc, in order to trigger a pre-programmed result or to confirm the performance of each party.
- Smart contracts are self-executing
- Smart contracts are typically maintained and executed on a blockchain or distributed ledger.
Now smart contracts sound like a step forward, but, like everything else in life, they have their benefits and their risks. Let’s understand the benefits that smart contracts can bring to the financial industry, insurance payouts, supply chain management companies, etc.
- Standardization of the code, terms, and means of execution should reduce transaction codes
- Security. Smart contracts are encrypted and stored on a blockchain
- Economy and speed. Smart contracts reduce transaction times and costs
- Certainty. Smart contracts execute automatically
- Business innovation. Increased automation of the transfer of digital assets and payment systems
- Regulatory innovation. Smart contracts may incorporate built-in regulatory compliance mechanisms
Smart contracts sound great, but they are definitely not perfect. Here are some risks that have been identified:
- Operational and technical risks, including software vulnerabilities, coding errors, internet service interruptions, etc.
- Cybersecurity risks, depending on the structure and security of the smart contract system
- Risk of fraud or manipulation, given that a smart contract may include nefarious code
The primary challenge to the enforceability of smart contracts is simply that they are written in software code on a blockchain, in contrast to traditional contracts written in words, either on paper or in an electronic medium. Given all this, what are your thoughts about smart contracts? Would you be interested in using them?
Remember that using a smart contract or not, you need to make sure your contract is properly written and covers your business and yourself. If you need any help with your company’s contracts, give us a call at (714) 415-2007, or reach us by clicking here.