Smart contracts can automate processes and reduce costs by eliminating manual or duplicative tasks, ensuring compliance with regulatory requirements and providing real-time updates to the parties. They can also eliminate or minimize the risk of fraud.
In its most basic form, a smart contract is a computer program that executes when certain conditions are met. These could include a financial market index or the location of a GPS device. The program then executes the coded business logic and memorializes outcomes for verification and compliance purposes.
The key to a successful smart contract is the blockchain, a distributed database that stores data and transactions in a transparent and secure manner. The blockchain enables the secure and efficient transfer of information, without involving intermediaries.
Using a smart contract to settle decentralized finance applications and peer-to-peer (P2P) cryptocurrency transactions is an obvious use case. But blockchain technology can be used to automate a wide range of processes, including those typically performed by financial institutions.
When a company needs to verify a patient’s health and insurance coverage, for example, it can trigger a smart contract that immediately reviews the insurance and pays the appropriate parties. This can improve patient care and reduce paperwork and administrative expenses.
Another potential application is in the music industry, where smart contracts can automatically credit royalties to an owner’s account when their song is used for commercial purposes. This could cut down on illegal copyright infringement and provide a transparent record of ownership.
This technology could be useful for government elections, where voters are tracked in a smart contract to ensure fair election procedures and accurate results. This is especially important in countries where a vote can be forged or fraudulently recorded by an unknown individual.
However, as a result of the nature of smart contracts, there are some risks that should be taken into consideration when assessing their use in a particular situation. First, it is essential to consider whether a smart contract has been designed to be legally binding. In many jurisdictions, courts will look to the common law rules of offer and acceptance to determine the enforceability of a contract.
Alternatively, state courts will use the statutory definition of a contract and examine whether the terms of the agreement satisfy the requirements for enforceable terms. The court must also consider whether the parties made reasonable efforts to understand the underlying legal issues involved in a given contract.
The enforceability of a smart contract is difficult to assess in practice, because the parties may not have the expertise necessary to interpret the technical issues. For that reason, courts may need to appoint experts to help them assess the enforceability of smart contracts.
While this can be a significant challenge, it is unlikely to prevent the widespread use of smart contracts. In fact, it may be more likely that the increasing use of these types of agreements will lead to a greater need for expert advice than ever before.