Smart Contracts: Is the transition from Traditional to Smart an Easy One?
Learning isn’t always a linear path. It most certainly isn’t when you’re learning about advanced topics like Blockchain. By the end of the year 2024, it’s expected that corporations across the world will spend $20 Billion each year on blockchain-related services.
As common knowledge to us by now, smart contracts work on Blockchain. They don’t rely on intermediaries, they are transparent to everyone. But, tell me, would you, as a representative of the general population, be willing to opt for Smart Contracts instead of Traditional ones?
Despite knowing all the advantages of Smart Contracts, one often fails to find the apparent differences between traditional things and modernized elements. So, before we move ahead, understanding the legalities of Smart contracts, the next topic for us to dissect is knowing the key differences between Traditional Contracts vs. Smart Contracts.
Traditional vs. Smart Contracts
It’s the classic debate if you think about it. Do we preserve the saying old is gold, or do we change it to new is diamond? The answer changes as per the situation, and in this case the situation is tough. With the world digitizing its assets and making the shift towards the online way of doing things, the obvious choice for most should be shifting to smart contracts. But it’s not the case, with people still being cautious for the right reasons. Blockchain isn’t familiar to a huge chunk of the population, and people would take time to trust it. Let’s dig deeper.
According to the Law Dictionary Organisation, traditional contracts can be defined as a ‘Common method of contracting where the client chooses service providers for the design of work and asks for bids on construction work.’
On the other hand, Smart contracts can be defined simply as programs stored on a blockchain that run when predetermined conditions are met. They are typically used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without an intermediary’s involvement or time loss.
Traditional contracts are centralized by a single authority, which means they can be owned and implemented only by one power. However, because the world is rapidly looking to decentralization its assets, many organizations are now completely decentralized. That poses an issue to these organizations, which look for ways to decentralize their contractual agreements. On the other hand, smart contracts are decentralized, meaning they aren’t owned by one single party, rather owned by networks of people on the Blockchain.
Smart contracts are open source and transparent, which means anyone can inspect the code, understand it and implement it. Traditional contracts aren’t transparent, which means no one can know their inner workings.
Traditional contracts are constrained by contractual terms, which are often defined outside the contractual rights and obligations of the contract. They operate as particular terms to which parties have to assign a contract-specific meaning. On the other hand, smart contracts are required to declare state variables at the start of the contract, which will persist through the life of the smart contract.
Smart Contracts are secure and valid. The Blockchain replaces the antiquated practice of employing pens and paper-based systems that require several approval channels. Instead, these smart contracts are coded with conditions that both parties have agreed to. When a triggering event, such as expiration date, occurs, the contract executes itself, evaluating whether or not the entity (money, titles, documents, images of dogs, etc.) should be confirmed. The terms are made public for openness, but the parties remain nameless.
The smart contract automatically executes upon completion of an agreed-upon metric and a transaction is confirmed. This process is incredibly secure and relies on only the two parties involved — no third-party middlemen are needed.
Smart contracts, as we know, are also immutable. Meaning once implemented, no one can bring any new changes to the code and the prerequisites. Even if one should make any changes to the smart contract, the action is captured, and that’s the proof for the smart contract’s immutability. On the other hand, traditional contracts don’t give us the liability to record changes made to them, as well as there’s no foolproof security for it to be immutable. In this case, traditional contracting gets risky.
Have you heard about escrow chains? A supply chain escrow account allows an amount of money to be placed in escrow by a buyer to assure suppliers that funds exist to pay for an order and that they have been reserved for that purpose. They also give the buyer the ability to control the release of those funds to the supplier.
Now escrow chains use a similar concept as smart contracts, with the benefits being
- In the event of insolvency, monies are protected and maintained for the mutual benefit of both parties.
- It is possible to have payments for completed work tranches released in stages.
- Funds will only be issued if all parties to the transaction agree or if a legally binding resolution has been reached in the event of a disagreement.
- It’s reassuring to know that the transaction’s counterparty will have been compelled to perform the same amount of due diligence as you, including verification of the receivers’ bank account, lowering the chance of fraud or human mistake.
Let’s talk about the legalities. Can smart contracts be held up in court? Well, not exactly. See, a smart contract is a piece of code. Still, the parties associated with the contract have the liberty to use pseudonyms, and their identity is only their online digital wallet. But fear not, there’s a solution for all problems.
Let me brief you about a concept called Ricardian Contracts for a second. A Ricardian contract is written using a combination of legal prose — perfectly understandable to lawyers and even ordinary people — and a markup language that allows for the defining elements of the agreement to be expressed in a machine-readable format that a computer program can execute. The written contract is then digitally signed by the parties involved and cryptographically verified.
Now let’s talk about how R3 from Corda is implementing this. R3 Corda is a distributed ledger technology platform that enables businesses to transact directly and in strict privacy with one another. They have produced many blockchain networks for the banking, trade, finance, and insurance industries.
R3 uses the Ricardian methodology to provide the security and privacy they promise. First, using the method shown below, they secure the digital key, which essentially acts as an encrypted signature.
By implementing the Ricardian methodology, we already see how smart contractors are making every possible move to make smart contracts the safest and most reliable type of contract.
The Future Looks Smart!
With all these features and elements jam-packed into smart contracts, there’s little to no doubt that smart contracts are the future. Multiple advantages over traditional contracts, and that they’re already looking at ways to better their working looks like smart contracts want to do it all. And we, for one, can’t wait to watch it unfurl.
Further Readings
https://medium.com/yodaplus/smart-contracts-diving-deep-into-implementation-cf4dd76c1955
https://dzone.com/articles/xinfin-remix-develop-smart-contracts-for-the-xinfi
https://howto.xinfin.org/get-started/smartcont/
