Part 2-A Guide to Smart Contracts

As a quick recap of the Part 1 of our guide, smart contracts are self-executing and have their agreement terms directly written into lines of computer code. The code exists across a decentralized, distributed blockchain network.

Smart contracts permit trusted agreements and transactions to occur among anonymous, disparate parties without the need for any external enforcement mechanism, legal system, or central authority or commonly known as intermediaries. They also render transactions transparent, traceable, and irreversible.

In this second part of our guide, we will look at some of the pros and cons of smart contracts as well as their use cases.


Why Use Smart Contracts?

A smart contract is irrevocable from entities outside (external data sources) or within (other smart contracts) the blockchain. If implemented correctly, it can provide transaction security that is superior to traditional contract law. Hence, it can reduce the coordination costs of auditing and enforcing agreements.

A smart contract can track an agreement’s performance in real-time, minimizing compliance, and controlling costs. What’s more, it reduces transaction costs of agreements, specifically the cost of reaching an agreement, formalization, and enforcement.

Smart contracts also bypass the principle-agent problem of organizations by providing transparency and accountability and reducing bureaucracy.


Use Cases of Smart Contracts

Smart contracts can, and probably will disrupt many industries. Their use cases cut across the chain and can be found in e-government, management, banking, healthcare, supply chain, insurance, telecommunications, and many more.

Under smart contracts, every process, agreement, payment, and task can have a digital signature and record that can be identified, validated, shared, and stored.

Example of technical use cases includes time-stamping services such as Bernstein’s patent registry or governmental registries (think birth certificates or land titles). On a technical level, time-stamping services are easy to implement. However, the regulatory aspects of these services are more complex depending on the industry and specific use.

Smart contracts can also be used for complex agreements such as along the supply chain of products, between a multitude of actors, or for governing groups of people who share similar goals and interests without the need for centralized institutions. For instance, Decentralized Autonomous Organizations (DAOs) represent perhaps the most complex smart contracts.


Smart Contract Shortcomings

Despite its name, a smart contract is not smart and cannot be interchanged with a legal contract. This is because a smart contract is limited by its code, the people coding it, and the information available at the time of its coding.

A smart contract may have the potential to enforce a legal contract if certain conditions are met. But there is still needed to resolve some techno-legal questions, which requires time and inter-disciplinary discourse between software developers and lawyers.

Smart contract security is still an issue that needs fine-tuning on a technical level. The code making up the contract must be perfect and have no bugs that can lead to mistakes or exploitation by malicious actors.


In conclusion

Smart contracts can make our world a better place by reducing fraud, delays, the overall cost of transactions, and commission paid to middlemen. They also allow two unknown parties to freely transact since there are no trust issues. These contracts have numerous latent use cases and have the potential to disrupt many industries.

Despite the many benefits of smart contracts (such as autonomy, trust, safety, and efficiency), they are prone to problems. Nevertheless, most of these shortcomings exist purely because smart contracts are as good as the creators created them. As long as these are used carefully, it undoubtedly will become an integral part of our society, in the not very far future.




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