Smart Contracts: A simplified explanation

Seeing beyond the hype wall

One aspect of Blockchains that is discussed a lot is its ability to be used to define so called “Smart contracts”. The hype around Blockchains has brought Smart contracts into focus again but the fact is that Smart contracts have been around much longer than Blockchain technology.

So what are Smart contracts ?

Smart contracts are essentially agreements that have embedded business rules that can exist and operate independently of any centralized control.Let me define Smart contracts in the simplest way possible:

A set of promises, agreed between parties and encoded in software, which, when criteria are met, are performed automatically.

By hardwiring the financial transaction process into software code, certain events can be triggered at specific milestones. The most obvious of these is at the point when the goods have been delivered. When the final delivery has been made and a scan or proof of delivery is generated, a signal can automatically be sent back up the Supply Chain, authorizing, for example, the release of funds to the exporter.

Now, because they are stored on a Blockchain, it is very difficult (if not impossible) to tamper or subvert the transactions related to the contract.

Smart contracts are not perfect

While they may reduce human error by reducing human intervention, this is not to say that errors cannot be made in programming the hard code in the first place. How this plays out in legal terms has really yet to be seen. According to lawyers, there is a reversal of the burden of litigation, with the exporter having to pursue a claim for damages, as the shipment will have already been delivered and the importer will be in the possession of the merchandise. At present it would fall to the importing party to pursue a claim for damages if delivery has not been made under the terms of the contract.

In addition, there are legal question marks over what happens when the Smart contracts become impossible to perform or there is misrepresentation or illegality. In some cases, a Smart contract may not be a contract at all, as it might not be recognized by certain jurisdictions.


Views my Own.

Will cover some unique application ideas of Smart contracts in a follow-up article.

 

 

 

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