Smart contracts are “contracts between parties stored on a blockchain” or “any computation that takes place on a blockchain.” The term can be used to identify a specific technology (smart contract code) or a specific application of that technology (smart legal contracts). The two uses of this term often lead to confusion and debates among individuals. Understanding the difference between the two uses of the word smart contracts will help you answer questions and better take a stand for your position on smart contracts.
Smart Contract Code
Smart Legal Contracts
The terms smart legal contracts refers to “a way of using blockchain technology to complement, or replace, existing legal contracts.” Unlike Smart Contract Code that can operate on its own, smart legal contracts need the assistance of the law. In other words, it would require a blend of code and natural language. An example would be a supplier of goods who enters into a contract with a retailer. While the payment may be automatically made when the delivery is made, an indemnification clause would no bring any value to a smart legal contract because a court would be needed to enforce it.
When can you use a Smart Contract?
There are many different uses for smart contract. In the past, they have been used by the financial field as instruments for stocks, bonds, or derivative contracts. This allowed them to simplify the process related to trading. In the future, real estate and intellectual property can be exchanged and traded over the blockchain system. The hope is that smart contracts can be used to facilitate new types of commercial arrangements and make more commercial relationships possible. Machine-to-machine commerce and the growing system of smart devices with the ability to communicate to one another is also a region for smart contracts to grow. While smart contracts will not necessarily work for legal contracts, they are commercially viable if there is a trusting relationship.
We hope this article has cleared up confusion on the term smart contracts and has provided information on when to use smart contracts. The different uses of the term in the field only adds to the confusion of blockchain technology and smart contracts. With more and more technologies emerging, we should see an increase in the use of smart contracts for commercial purposes. Using them for legal matters is not recommended for the reasons stated above. Lawyers looking at smart contracts often see them as marginally approved legal agreements, but fail to see the potential of blockchain-code to extend beyond law’s reach.
Source referenced: Coin Desk