The key essential basics everyone should know about Smart Contracts

In finance, business, and everyday economic transactions, contracts play an essential role in ensuring that all parties involved have a legally enforceable agreement that clearly stipulates all the required obligations, terms, and conditions relating to the interaction and execution of the agreement between the parties. Most contracts relate to the transfer of goods, services, money, or a promise to transfer or deliver these at a later date. The contract protects both parties in order to ensure that the terms of the agreement are adhered to and further provides either party with the right to seek judicial remedies should there be a breach of contract.

With the advancement of technology, specifically the development of blockchain, there are new contract options available for finance, business, and economic transactions that enable more efficient management and execution of an agreement. Without the need for third parties or any intermediary or paperwork, Smart Contracts are able to be executed with speed and efficiency. They are rapidly replacing everyday contracts for things such as loan agreements, sales of goods or property, and investments.

What are Smart Contracts?

Essentially Smart Contracts are digital contracts that are stored on the blockchain and programmed to execute when certain predetermined conditions of the Smart Contract are met. The contract conditions can be anything from a simple transaction to a highly complex set of conditions, terms, and deliverables. Smart Contracts run on the Ethereum blockchain.

Smart Contracts are considered to be “smart” because once they are deployed, they are fully automated and do not require any intermediary or third party to be involved in the execution of the agreement. They are self-enforcing, immutable contracts that auto-execute when the predetermined conditions of the agreement are met. Smart Contracts are able to handle highly complex agreements and these agreements are loans, sales, or financial transactions that can be executed efficiently, and quickly with a permanent detailed record of every transaction that is trackable as well as irreversible.

Main Advantages of Smart Contracts

Immutability: One of the strongest advantages of a Smart Contract is its immutability. Once a Smart Contract is deployed, the agreement cannot be changed by anyone or anything. The code will execute as per the predetermined terms of the contract. The execution and performance of the contract are guaranteed to take place every single time. A detailed history of all transactions forming part of the contract will be recorded on the blockchain forever which enables greater transparency and auditing as well as ensures an open tamper-proof record of all transactions.

Speed, efficiency, and accuracy: Smart Contracts are automated so that when a condition is met, the contract is executed immediately. There is no need for an intermediary or any manual filing of paperwork and all details are recorded instantly on the blockchain. Therefore, unless the code governing the contract is flawed, there is no need for reconciliation to check for and correct errors that resulted from the execution of the contract. Traditional paper-heavy processes that are prone to human error, consume a lot of time, and often require third-party mediation are eliminated through the use of Smart Contracts.

Security, Trust, and transparency

Blockchain uses a distributed ledger, which means that all transactions and data relating to the Smart Contract are recorded identically across multiple locations. At any point in time, all network participants who have the defined access are able to see the same information at the same time, which provides for full transparency. With all the transactions being immutably recorded, time and date stamped, each transaction is connected to the previous and subsequent transactions, with the data being stored cryptographically making it virtually impossible to hack. In order to alter the record of one transaction, a hacker would have to alter the entire chain which is highly impossible. Smart Contracts on the blockchain, therefore, eliminate the opportunity for fraud.

Disadvantages

Immutability: One of the biggest disadvantages of Smart Contracts is their immutability. While it is also one of its advantages, the fact that the Smart contract cannot be amended, or reversed once deployed means that there is no chance of a quick fix if an error was made in the contract or if you wanted to change or add to the terms within.

Should any weakness or errors be detected in its code after its deployment to the blockchain, the contract would not be able to be fixed and it would have run its course. This could have serious and problematic consequences. A new Smart Contract would need to be deployed in both the case of errors and amendments. These cases should be avoided prior to implementation by a thorough review of the Smart Contract prior to its deployment.

Third-parties: While Smart Contracts completely eliminate the need for third-party involvement in order to execute the contract, there is often a need to involve third parties in order to develop, design, and deploy the Smart Contract. Meticulous planning and pre-deployment work are required in order to ensure that the terms of the Smart Contract are designed in such a way that it is executed effectively and efficiently when the conditions have met the contract. Any vague, or unclear terms could result in catastrophic failure of the Smart Contract and subsequently jeopardise transactions.

Summary

Smart Contracts have the potential to transform and revolutionize how we do business by streamlining transactions, automating processes, reducing costs, and better-aligning business interests globally. There is no denying the disruptive power of self-executing agreements in which relevant parties are certain that contractual obligations have been met upon execution.

Smart Contracts are accessible to all participants at any time and maintain a detailed record of all transactions which are immutable. This means that the transaction records can be reviewed at any time, forever. This eliminates the potential of human error or the need for capturing any paperwork and empowers a more efficient accurate auditing and regulatory review.