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Understanding Smart legal contracts

Understanding Smart legal contracts

on July 20, 2021

Understanding smart legal contracts – a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of any agreement between participants on the blockchain.

After the first heard of blockchain technology sometime in 2008, it took a few extra years before the term smart contract trickled into the mainstream. We have since come a long way in blockchain adoption and many industries, sectors and markets have benefited from the novel technology. But there are still some areas of misconception and ambiguities around smart contracts. 

While blockchain is best known as the technology behind cryptocurrency, smart contracts are, in fact, its most promising innovation. One can’t fully appreciate the potential of blockchain technology and the implications of its adoption without first understanding smart legal contracts. 

Benefits and risks of using smart contracts

We can say with certainty that they have the potential to impact countless industries and individuals. Today, we look at the basics to promote understanding smart legal contracts and how they could change our world. 

It’s not a widely-known fact that smart contracts predate blockchain. They were first mentioned in 1994 when a computer scientist named Nick Szabo wrote an essay titled “Smart Contracts.” He wrote: 

“A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to satisfy common contractual conditions […], minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries.” 

N. Szabo

Similar to a standard, paper-based contract, a smart contract is a signed agreement between parties based on a set of conditions. If either party fails to meet the terms or breaches the agreed-upon conditions, the contract is invalidated and the agreement can be terminated. 

There is, however, one key difference between a smart contract and a traditional contract. The first carries out these operations through a code that exists on a decentralized blockchain. Rather than relying on complicated legal systems, paperwork or third-party intermediaries, a smart contract enforces an agreement through the use of computer code. 

In a way, a smart contract is a piece of code that contains the contract’s terms. That code is then integrated into a blockchain leveraging its distributed ledger technology. The code then automatically executes the terms of the contract as soon as all parties consent to its conditions and satisfy all qualifications. 

The network of computers (nodes) that run the blockchain is automatically recruited for this process. In this sense, every participant in this vast decentralized network of computers that make blockchain becomes involved in upholding the contract. Blockchain nodes thus become the guardians and executors of the contract, eliminating the possibility of error or fraud. As a result, smart contracts are executed in a manner that is secure, transparent and efficient throughout. 

The reason for this lies not only in the programmable nature of a smart contract but in the blockchain’s ledger as well. It serves as a built-in, unchangeable history. This record provides objective proof of all details related to the smart contract. This includes when the contract began, its terms and whether the parties involved satisfied their ends of the agreement. 

Because smart contracts are fully automated, they never require a third-party’s oversight. Once it’s written into the code, which is then added to a blockchain, the terms of a contract are either satisfied or they are not. If they are satisfied, the code instantly executes the transaction. Conversely, if the terms are not met, the code takes no action. 

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