Smart contracts

What are smart contracts?

Smart contracts are stored on a blockchain that runs when conditions that are set out in the contract are met. Smart contracts are automated, which means all parties involved can be immediately certain of the outcome, without the need for manual processes that are involved in manging traditional contracts. You can use smart contracts to help with the exchanging of money, shares, and anything else of value to your organisation.

How do smart contracts work?

Smart contracts are written into code on a blockchain by following if/when/then statements that are usually written in traditional contracts. These statements must be agreed by all parties, so that the data is accurate and fairly represented. It’s also important to establish an outline for resolving disputes. The computer will then execute the actions once conditions have been met, for example releasing payment. Once this has been done, it cannot be changed and only people with access to the contract can see the outcome.

Are smart contracts enforceable?

The standard rules of UK contract law apply to smart contracts, if the following three key features of contract information are present:

• Agreement has objectively been reached between the parties as to the terms.
• The parties intend to be legally bound by their agreement.
• Each party has considered one another, to make the contract enforceable.

Each smart contract will be assessed according to its own individual characteristics.

What are the benefits of smart contracts?

• Efficiency:
  Smart contracts are automated, meaning contracts get executed immediately once a condition is met. There’s no paperwork involved too, so they help to avoid human errors that occur when filling in documents.
• Transparency:
  Smart contracts are shared across all parties and are encrypted so information in the contract cannot be altered.
• Security:
  Smart contracts are written in blockchain making them a more secure way of storing a contract.
• Cost and time savings:
  Smart contracts are automated meaning people are less involved in the handling of them, saving time and money.

What are the challenges of smart contracts?

Smart contracts digitally facilitate the control and executions of an agreement and are used in a variety of different sectors. Although they are used to save time, money and improve efficiency, they do have their limitations.

• Third parties still exist:
  Although smart contracts aim to eliminate third parties involved in contract management, there is still a need for them. For example, developers who are creating the smart contracts will need a ‘go to’ source to enable them to understand and create the codes for smart contracts.
• Steep learning curve:
  Smart contracts will be a steep learning curve for your organisations, as you are moving away from traditional written contracts to computable code.
• Technology mishaps:
  As with all technology, issues and errors occur. Poorly coded contracts are susceptible to hackers and other vulnerabilities.