You might have heard of smart contracts in relation to blockchain technology, but do you know what they are and how they work? Read on to find out…
A smart contract runs on the blockchain and works as an agreement between two parties in the form of computer code. It permits trusted transactions and agreements to be carried out without the need for a central authority or legal system. Once a smart contract is executed, it cannot be changed.
There are many cryptocurrencies that run smart contracts on their blockchains, the most popular being Ethereum (ETH), Chainlink (LINK), Stellar (XLM) and Waves (WAVES).
Smart contracts have many benefits, such as accuracy, transparency, speed, security and efficiency. Before a smart contract can be executed, all terms and conditions must be recorded in explicit detail. They must also be fully visible and accessible to the relevant parties.
Smart contracts process much faster than traditional contracts. With a typical contract, you have to wait several working days for a lawyer or broker to process the agreement. Smart contracts, however, run on code and are live on the internet, which means that transactions are immediately executed once conditions of the agreement are met.
Smart contracts are also more cost effective than traditional agreements, as you don’t have to pay any third-party fees.
However, the anonymity surrounding smart contracts can be disadvantageous. For instance, in the event of a disagreement or dispute, they are extremely difficult to take to court. This is because a smart contract doesn’t require legal identity, and the relevant parties cannot be identified by their wallet addresses alone.
Now that we’ve covered what smart contracts do, let’s look at how they can be implemented. Smart contracts are mainly used for peer-to-peer transactions on the blockchain. But what else can they be used for?
Smart contracts have the potential to transform property ownership. They can be used to record ownership of buildings, land or even smaller things like phones and watches. In terms of the housing market, as smart contracts remove the need for expensive services from third parties, they ultimately give the seller full control of how to handle the transaction.
Smart contracts can also be implemented for mortgages. We all know that the usual process for mortgages can be stressful and time-consuming. But smart contracts can make the process cheaper, faster and more secure. These types of mortgages allow both parties to agree to the sale before the payment is processed. The smart contract then updates the ownership details, meaning buyers will be able to move into the property much quicker than with a regular contract. Security isn’t a concern either, as smart contract mortgages require a unique authorisation code on behalf of the original owner.
Smart contracts certainly offer a faster, easier and much more cost-effective alternative to traditional contracts. But will they end up replacing them for good?
According to New-York based law firm, Romano Law, traditional contracts are not in danger of being completely replaced. While smart contracts may simplify transactions, they’re not ideal for all of them. The potential legal issues surrounding them, such as the problem of seeking legal action following a dispute, are also worth considering.
On the other hand, Cointelegraph believes that the advantages smart contracts have over traditional contracts will be the driving factors towards complete replacement. They believe that they can even change the world by “revolutionising the legal system that exists today”.
Do you think smart contracts will eventually replace traditional contracts? Let us know your thoughts in the comments.
Disclaimer: Wirex uses smart contracts for ETH transfers, so please make sure that your external wallets can send to smart contract addresses.