Government, management, insurance, real estate, supply chain, healthcare, and finance are just some of the industries that have begun to embrace smart contracts. Essentially self-executing arrangements or agreements between 2 parties, such as businesses or individuals, are powered by blockchain and have an enormous potential to help organizations scale and grow.
The idea of smart contracts was first introduced by Nick Szabo back in the 1990s, but it wasn’t actually realized until Ethereum spearheaded it in 2014. Now, the movement is growing. But while there are many benefits, there are also plenty of drawbacks. Is it the right solution for your business?
What Are Smart Contracts?
Smart contracts are like regular contracts but with a major difference—they are self-governed. In other words, once the parties involved reach an agreement over the terms and conditions of a smart contract, it goes into effect immediately and executes itself automatically as long as the terms are being met.
So, for example, a smart contract in the insurance field can automatically send money to an insured party after they present the necessary documentation proving they were involved in an accident.
The content of smart contracts is housed across a blockchain network. That means the self-executing contract is also immutable and exists within a decentralized, distributed network. There is no need for an intermediary — the 2 parties can carry out the agreement without a central authority or governing figure.
The transactions that take place via a smart contract are irreversible and can be traced, given the technology that supports it. This means the process of carrying out the agreement is both standardized and simplified.
5 Benefits of Smart Contracts
Agreements carried out via smart contracts are considered secure, thanks to factors like the immutability of the blockchain supporting them. Moreover, the contracts are traceable and transparent, adding additional layers of safety to the arrangement.
2. Efficiency and Speed
Smart contracts are all about automation. Rather than spending a huge amount of time completing paperwork and getting everything in order, you can execute the agreement in an instant, saving plenty of time and effort. What’s more, there is no intermediary necessary, so the parties involved don’t need to wait for a central figure to oversee, approve, or sign off on the agreement.
Once it’s clear that everything is in order, the terms of the contract will automatically be rendered.
Given the lack of a need for an intermediary, along with additional costs associated with clarifications, meetings with notaries — whom you don’t have to pay to witness the signing — legal fees, and more, you will almost certainly save money. By leveraging smart contracts, as opposed to traditional contracts, you’ll have limited expenses. Once the document is signed and submitted, the fees end there.
Smart contracts are initially coded with the details in mind. That’s why so many businesses and individuals who have used smart contracts say they are so reliable. Initially, the terms of the agreement are explained in great detail. Remember, too, that there’s a record of the agreement on the blockchain, one that is unalterable, so the details are explicit and immutable.
This, perhaps, is one of the main advantages of smart contracts. We have already underscored the point that there is no intermediary required to carry out a transaction or agreement via a smart contract — no lawyer, notary, broker, or another middleman, so to speak. And that means both parties have a greater degree of autonomy.
Because these contracts are self-governing, they are managed automatically by computers, rather than by individuals, who are more prone to error and bias.
4 Drawbacks of Smart Contracts
1. Sometimes Faulty Code
Unfortunately, a smart contract is only as good as the code on which it is initially based. Because much of the code involved is open-source, anyone can alter the base, and cybercriminals can take advantage of potential flaws — flaws that could be detrimental to the overall contract.
And while the immutability of a smart contract is often seen as a benefit, if there are errors or bugs in the foundational code, these problems will be permanent in the final version of the smart contract.
2. Legal Implications
Smart contracts are a relatively new phenomenon. So far, they have weak oversight and little to no regulation. This can have serious implications for the nature and content of the agreement. Because the details aren’t necessarily legally binding, serious problems can arise later on.
For example, perhaps one of the parties wants to withdraw from the agreement down the road. Will the smart contract be enforceable in a court of law? Moreover, what recourse does the other party have, and in what ways should the contract be interpreted in a legal sense? These, among other regulatory matters, must be clarified sooner rather than later.
3. Lack of Flexibility
The immutability of smart contracts, on the downside, also means that there is a lack of flexibility concerning them and their deployment. It’s very difficult to alter them in any way once they have been implemented. That means that parties need to be very careful when they draft and code them throughout the process. While this is often positive for businesses, it also means that there can’t be any mistakes or unclear language or terms.
Scalability has long been a concern for products, tools, and technologies involving blockchain. For simple agreements, smart contracts can take place quickly and efficiently, but this isn’t necessarily the case when they need to be deployed at scale. This is a problem for larger businesses and organizations that intend to use smart contracts for more complex and involved matters and agreements.
Blockchain has already disrupted the way businesses function in a number of ways. Smart contracts, backed by this powerful technology, are bound to be a game-changer, too, forever altering the way we negotiate and carry out our interactions and agreements. The benefits are real, from efficiency to cost savings.
But as they stand now, they’re not the solution for every business. As they evolve, businesses will need to balance their needs against the challenges smart contracts present to them. After all, they have the potential to revolutionize business deals forever.