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Ever since cryptocurrencies became mainstream, decentralization and blockchain
have been leveraged to a great extent. We know that Bitcoin is not the only
cryptocurrency, and cryptocurrencies are not the only application of blockchain
Blockchain technology helps eliminate intermediaries, encrypt data at a high level,
and build trust and transparency with each transaction or modification made
through the blockchain architecture.
When we talk about transparency and data validation, we talk about smart contracts.
A digital protocol built to validate and enforce the involved parties’ compliance with its terms and conditions, a smart contract is self-governed and helps automatize legal and financial sectors, bringing breakthroughs within the industries.
While traditional or ordinary contracts can document the terms of the deal and penalties for the violation, smart contracts ensure that all terms and conditions (written in the application’s code) are met.
In the case of insurance, for instance, one can receive the claim automatically once they present the necessary files and documents to prove their case of accident or involvement in the accident. The parties involved can carry out the agreement without any central authority or intermediary involved, and the smart contract gets self-executed upon meeting the defined requirements.
The transactions regulated by smart contracts are transparent, irreversible, immutable, and traceable.
Now let’s focus on the merits and demerits of smart contracts, and know when to adopt them or not.
Advantages Of Smart Contracts
When smart contracts run on the blockchain infrastructure, one needs to ensure that the agreement;s details will be unalterable, explicit, and immutable. This allows the parties involved to forge clear and legible agreements that are agreed upon by both parties so that the transactions result in accurate outputs, conforming to the predefined rules set.
The biggest benefit of smart contracts is that they run automatically. Necessary information can be processed within these instead of spending time on paperwork and approvals. Once the terms and documents are clear and final, they can be rendered automatically and executed instantly on the meeting of conditions.
Smart contracts are built on the blockchain, which facilitates immutability and data encryption at a great level. No modifications or manipulations can be done unless they are approved by all the parties that guarantee traceability, transparency, and extra safety to the arrangement.
With no intermediaries involved to carry out an agreement or execute transactions between the involved parties (no notary, middlemen, or broker keeps a space), smart contracts offer a great degree of autonomy to all those involved.
They facilitate the rights to self-govern and are managed automatically by software applications that are less prone to errors and biases and are more economical.
Smart Contracts: Drawbacks
Lack of Flexibility
The immutability factor of smart contracts becomes a hurdle to flexibility concerning them and their deployment. It is impossible to make changes in an already implemented agreement, making it bothersome for the parties while they create and code them throughout the process.
Technologies, products, and services backed by blockchain are generally less scalable when expanding over complex features or procedures. Likewise, smart contracts can create problems for large businesses when solving complex problems. Though simple agreements can take place quickly and efficiently over smart contracts, they lack scale-up over complicated scenarios.
As there is no legal boundary to control these self-governing contracts, withdraw from the agreement down the road can cause issues. The legal interpretation of a smart contract must be clarified beforehand.
This is not a common occurrence. However, smart contracts perform well only on the initial code that they are based on, and since much of the code is open-source, it is vulnerable to alterations made to the base. Cybercriminals can take advantage of even a single flaw in the base code that can prove detrimental to the entire contract and the parties involved in it.
Should All Businesses Invest in Smart Contracts?
Blockchain has proven to be revolutionary in business functions. Smart contracts, an application of blockchain technology, have also rendered tremendous benefits to industries, molding the ways of negotiations and privacy carried out in formal agreements.
Nonetheless, they can not be a generalized solution. Businesses need to weigh their requirements against the risks and challenges, and be mindful before developing and implementing smart contracts.
To know how Blockchain Technology and smart contracts can potentially revolutionize your business realm, talk to our Blockchain Experts before you make up your mind.