Understanding Smart Contracts – What, What Not and Why?

Understanding Smart Contracts – What, What Not and Why?

In legal terms, a contract is an agreement between two parties in which they agree to abide by certain terms & condition and specific procedures, that would hold true under certain situation/cases.

Now the physical contracts has its own set of problems like storage, theft, physical transfer etc. Due to this, digital documents came into play that covered some of the problems of physical documents. But if we talk about contracts, the digital contracts have two main issues:

  • It can be easily copied
  • The validity of signature is questionable

Hence came the idea of utilizing blockchain technology in making and executing an agreement in the form of Smart Contracts. In simpler terms, Smart Contracts are nothing but unalterable conditional codes written in a blockchain network, to perform certain actions, if specific conditions are met i.e. “it this happens, do that”.

Specifically, Smart Contracts are:

– A pre-written computer code/logic that is
– stored on a distributed database of a Blockchain network which is
– executed/run by the same network of computers (nodes),
– and can result in ledger updates like cryptocurrency payments.

As exciting as they may sound, Smart Contracts are just computer logics in a blockchain network. They don’t have a brain of their own (artificial intelligence). In practical scenario, they provide security and reliability to an agreement digitally, but can’t completely replace some of the legal processes of the real world.

-Smart Contracts can’t act completely autonomously: The code of a smart contract is executed only when called upon by a transaction/ message, sent to the smart contract by an external account or another smart contract.

-Conflict Management remains the Same: Handling conflict pretty much follow the same route as with all traditional contracts, i.e. via courts, mediation etc. The main difference will be that in a lot of cases, the transfer of value as a result of automated contract execution had already taken place.

So then, why should an Enterprise opt for Smart Contracts?

The most undeniable truth of the real world is that the things don’t go as planned. Despite both parties have a copy of the original trade documents and they both have a view on the external dependencies of the trade,a disagreement can occur because of one of the following:

-Confusion created due to mismatch between multiple copies of the original trade terms
-A misunderstanding of the initial trade terms
-A disagreement with what happens if the external dependencies changes

Written in a computer code, a smart contract has only one set of trade terms. This is far more concrete than the formal and technical clauses of legal documents, agreed upon up-front. The external factors can be fed in via a mutually agreed feed. The contract remains on a Blockchain, and run when an event happens or when duration of the contract expires. The transfer of value as a result of automated contract execution would take place when the mutually agreed conditions are met.

Sofocle has gained tremendous expertise in developing Smart Contracts as part of various solutions like Supply Chain Finance, Trade Finance and Product supply chain. If you would like to know how Blockchain and Smart Contracts can be useful for your enterprise, contact us.