BlockchainBlockchain Technology

Understanding Smart Contracts

By September 10, 2018 No Comments

Legally, a contract is defined as an agreement between two or more entities in which they agree to respect a set of terms and conditions as well as certain specific procedures that would hold true in certain cases.

There are a unique set of challenges that arise from physical contracts such as theft. As a result, digital documents have entered the equation and this has solved certain problems that arose in the physical document era. The two main challenges of digital contracts are:

  • They can be duplicated with ease
  • Signature validity is in doubt

Blockchain can help in the processes of drawing up and executing an agreement and this type of agreement is called a Smart Contract. Smart Contracts are unalterable, condition code written in a blockchain network which is tasked with executing certain actions if a pre-agreed set of conditions are met

Smart Contracts are effectively just computer logic coded into a blockchain network. They provide safety and reliability to an agreement digitally, but cannot comprehensively replace all legal processes of the physical world.

-Smart Contracts can’t act completely autonomously: The logic of a smart contract is executed when it is called upon to do so by a trigger. This trigger is sent to it by an external party or an independent smart contract.

-Conflict Management remains the Same: Dealing with conflict follows a similar route to that of physical contracts, that is, through courts and similar places of mediation. The significant difference is that in many of cases, the transfer of value might have already happened due to the automatic nature of contract execution.

So then, why should an Enterprise opt for Smart Contracts?
One of the home truths of the real world is that not everything goes according to the plan we have. In spite of both entities of the agreement having a copy of the original trade document as well as a clear view of the external dependencies of the deal, some disagreements can occur because of some of the following reasons:

  • Uncertainty caused as a result of mismatches among the many copies of the original terms of the agreement
  • Miscommunication of the original terms of the agreement
  • Lack of a clear understanding of what will happen if there is a change in the external dependencies

Written as computer code, a smart contract has a single set of terms for executing the contract. This provides more clarity than that of a legal document where all points both of a formal as well as technical nature are discussed and agreed upon in advance. External dependencies can be inputted via a mutually agreed feed. The contract remains on Blockchain and is run when a pre-agreed condition is met or when the time of the contract expires. The value transfer that happens due to automatic contract execution takes place only when the pre-agreed arms of the contract are met.

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