What does the future hold for smart contracts?
Contracts are going digital. With certain online asset transactions already using blockchain-based software as their primary mode of contractual agreement, what does the future hold for smart contracts?
But what are the risks of employing such technology, and are legal teams ready to harness this young but fast-paced industry?
For those who need help understanding how smart contracts work, it is useful to think of a drinks vending machine. Using a self-executing mechanism, these machines are pre-programmed to release a can of fizz when the customer puts their correct cash into the slot and makes their selection.
Smart contracts are also self-executing. Using pre-determined, programmed parameters, they regulate a party’s adherence to the contract’s terms and may even perform actions in case of a breach, such as automatically charging a late payment fee for missed deadlines. No third-party intermediary is required because the terms are written directly into lines of code across a distributed, decentralized blockchain network.
At present, the average consumer would correctly assume that smart contracts are commonly used to regulate blockchain transactions, such as dealings in digital assets like non-fungible tokens (NFTs) and cryptocurrency. However, they can also be used in any transactions in which automation is possible. For example, smart contracts can be used in a real-estate deal in which the buy and sell obligations can be automated once the buyer pays the property value to the seller. In trade finance, they can be used to effect cross-border payments and implement automated escrow accounts.
They can also help governments improve departmental transparency and efficiency. Banks can also avail of smart contracts for liability payments, digital identification, automatic payments, and stock splits and dividends dealings. These are only a few examples. Their use is also spreading to other sectors, such as the commercial and M&A sectors, where smart contracts can be used to configure entire corporate structures.
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