What are smart contracts on Blockchain? Benefits and the future

You’ve probably heard of smart contracts if you’ve read any news on Web3 or blockchain

You’ve undoubtedly heard of smart contracts if you’ve read any news about Web3, metaverse, non-fungible tokens (NFT) or cryptocurrencies. You are undoubtedly also curious about how they operate legally and what they could mean for the future of your company.

A key component of Web3, the evolving decentralized internet that many believe is the future, are smart contracts. As Web3 evolves, companies (including lawyers) that are savvy in smart contracts may have an advantage over their rivals.

What is a smart contract?

A smart contract is not the same as a standard legal contract. It would be more accurate to describe it as computer software, similar to an automated digital escrow agent, which ensures that things are done according to the agreements between the parties.

Smart contracts are programs with code that, when certain conditions are met, cause certain actions to be performed. This automated execution process ensures that everyone keeps their end of the bargain. Many smart contracts are enforceable in court like conventional contracts, so if a party is unable to fulfill its obligations, there may be legal consequences.

Blockchain technology, a decentralized, digitally distributed ledger with a cryptographic foundation, powers smart contracts. Instead of being on a single server, it exists on a network of computers. Furthermore, it is immutable, meaning that no contracting party can change the terms or conditions of the smart contract once it is distributed to the decentralized network without the network’s consent.

How do smart contracts work?

Smart contracts are quite easy to understand. The smart contract automatically performs the agreed upon activities when a predetermined condition or combination of circumstances is met. This can be anything from sending a message to your phone to moving money between parties. The simplest illustration is a vending machine.

When a smart contract is deployed, it starts “listening” for updates from an input oracle, which connects the blockchain to external inputs. Smart contracts can transmit signals to other systems to make them act thanks to output oracles.

The oracle notifies the smart contract when the transaction is complete, and the blockchain is then modified to reflect the successful completion of the transaction. Thus, for example, someone can buy a vehicle with Bitcoin. The smart contract can ping an IoT device inside the car to unlock the door as soon as it detects the signal that the payment has been completed.

Advantages of smart contracts

Smart contracts are beneficial and disruptive to business in many ways across virtually every sector. The following are some of the key commercial benefits of smart contracts:

Security: It is extremely difficult to break into a smart contract due to the immutable nature of blockchain technology. Without going through the entire chain, which would include compromising most of the network’s machines, it would be impossible for a bad actor to change a single disk.

Efficiency: Smart contracts remove the need for intermediaries such as physical custodians and asset managers, eliminating execution delays. The agreed action is performed by the smart contract as soon as the prerequisites are met. Instead of complex, persistent commercial connections, this works best for discrete one-off transactions.

Accuracy: The chance of human error after implementation is negligible since smart contracts are fully automated.

Transparency: As smart contracts are spread through a network; each party has access to a copy of the agreement. Updates can be traced back to the source for all parties using the blockchain.

Financial savings: Savings on service costs and delays are possible by removing the requirement for intermediaries.

Yet like all technology, smart contracts have some drawbacks. First, their duration prevents you from going back and fixing errors in the code. You are also dependent on the programmer who created the contract, which makes it challenging to verify that the code accurately reflects all of the terms and conditions.

Also, smart contracts can have errors programmed into them. A knowledgeable Web3 attorney can help prevent your business from being on the wrong side of a fraudulent cryptocurrency transaction.

Future prospects for smart contracts

Will the use of smart contracts in commercial transactions spread? It’s hard to know for sure. The potential uses for Web3 are many, but we will have to wait and see how the technology develops over the following years.

But for now, it’s a good idea to create smart contracts after doing your research. Working with a qualified attorney can help you avoid some of the problems with bad faith agreements, just like with conventional contracts.