Computer scientist and legal scholar Nick Szabo first proposed the idea of smart contracts two decades ago. He suggested that the decentralized ledger could be used for smart contracts, otherwise called self-executing contracts, or digital contract Management Software.
Today, even if the actual use of smart legal contracts remains largely in the future, the idea has gone mainstream.
You might have heard this term many times and would be thinking about it often. This quick article is aimed at providing you with a very brief overview of smart contracts, its usage, and key benefits.
What exactly is a ‘smart contract’?
Smart contracts are really just pieces of computer code, in which the terms of an agreement are embedded. The code is built on the premise of ‘if’ and ‘else’ conditions, meaning that an action is only executed if and when certain criteria are met. This way, all parties using the contract can be assured that fulfillment of the contract’s terms is being monitored and controlled digitally.
What might you use smart contracts for?
There are many proposed used cases for smart contracts. Perhaps, the allocation of funds to a vendor following a property sale, using a rule-based code. Or, the tracking of ownership rights in order to apportion royalty payments. One can use smart contracts for different situations ranging from financial derivatives to insurance premiums, breach contracts, financial services, legal processes & crowdfunding agreements etc.
What are the key benefits?
The blockchain technology hosting the smart contract means that information. Encrypted and duplicated across the ledger, and that transactions are traceable and backed up. This provides an irrefutable audit trail and reassurance of security and transparency of the agreement. All members of the blockchain network have an identical copy of the data, without the need for reconciliation.
Another benefit is increased speed of transactions through automation. Since the smart contract self-executes, this could realize a time reduction in insurance documents being issued, or claims being paid to customers. In turn, this may drive up customer satisfaction levels in your organization.
Are there any associated risks?
Smart contract technology is certainly promising, yet remains in its infancy. Therefore many people are either unfamiliar with the concept or skeptical of its potential. There’s also the associated cost of migrating existing systems onto blockchain platforms, plus the technical know-how to perform this task.
Other concerns center on the potential for cyber attacks. Currently, there’s no legal framework specifically designed for smart contracts and blockchain.
So what happens in the future?
Smart contracts are definitely going to impact changes in the legal industry. Lawyers and legal industry practitioners will transition from writing traditional contracts to producing standardized smart contract templates, similar to the standardized traditional contracts that you’ll find on DocuCollab.
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