Smart contracts are computer programs that run on blockchains and can be used to automatically execute pre-programmed steps. They are intended to automate or reduce the amount of manual tasks involved in a number of business processes.
The most common use case for smart contracts is a digital agreement between two parties. These smart contracts can essentially replace the traditional legal contract in which parties sign their consent to be bound by certain terms.
For example, a retail store could set up a smart contract to deliver the store’s supply of apples to the store’s customers once a set number of apples have been received and verified by the store. This will save both parties time and money in the long run.
Another important aspect of smart contracts is that they can also be programmed to act upon data collected from external sources. This is accomplished by using oracles, which are applications that fetch data from outside sources and then feed it on the blockchain for use by smart contacts.
It is important to note that smart contracts can only be enforceable under certain conditions. Those conditions will need to be defined by the contracting parties and enshrined in the contract. If the parties fail to define these conditions, a court might find that the smart contract is not enforceable.
As smart contracts become more widely adopted, there will be a need for further judicial clarification of the meaning and scope of the terms under which they may be deemed enforceable legal agreements. This may involve a number of issues such as whether terms can be legally waived or nullified, and how to determine when a term is not enforceable.
Moreover, as smart contracts become more complex, parties will need to agree on which provisions are sufficiently objective and measurable to allow smart contracts to be deemed enforceable legal agreements under the law of the relevant jurisdiction. This process will likely take some time and will be highly dependent on the industry in which a party is adopting smart contracts.
Some of the most common uses of smart contracts are payments, transactions, and insurance policies. These areas can be characterized by frequent transactions between parties and the need for a lot of repetitive tasks.
A key benefit of smart contracts is that they can eliminate the procure-to-pay gap, which is the time between a product being scanned at the warehouse and the point in the supply chain where funds are transferred from the seller to the buyer. This eliminates the need for dunning notices or other collection costs and can greatly reduce account payable expenses.
In a transaction involving a credit card, smart contracts can be programmed to transfer the amount of the payment from the credit card account to the other party’s account. This can be a particularly useful tool for resolving disputes that otherwise would result in costly judgments against a party that has not paid.
Smart contracts are a promising technology that can significantly improve how businesses interact with one another. They will inevitably lead to significant innovation in a wide range of industries and can be a great boon for both suppliers and consumers, saving both parties time and money.