Why You Should Be Paying Attention to Smart Contracts on the Blockchain

Cryptocurrency, Non-Fungible Tokens (NFTs), and the Blockchain. These are all popular buzzwords right now; you’ve probably seen them. Whether you currently work with and understand blockchain technologies or not, there’s reason to start gaining a basic understanding of what they are and how they work. Smart contracts in particular could soon have a big impact on everyone’s lives.

Smart contracts are commonly associated with crypto and NFTs, but their use extends far beyond that world and could be the future of how we execute most contracts. To better understand smart contracts, we must first understand the blockchain, which is where the contracts are stored.

What is the blockchain?

A blockchain is a form of a computer database. The “blocks” of a blockchain collect and store sets of information and data in a decentralized fashion (meaning individuals maintain control over their respective data instead of one entity overseeing the entire operation). A block will gather relevant data, and when a block is filled, the block is then “chained” to other blocks chronologically, locking the data into place and ensuring further changes cannot be made.

So far, the blockchain is mostly used as a means of recording transactions to prevent those transactions from being altered in the future. We’ll explain shortly why this could become more useful in daily life.

What is a smart contract?

Smart contracts are similar to any other contract you’ve seen. There are a set of terms agreed to by each party involved in the negotiations. However, once the terms are agreed to the contract is stored into a block on the blockchain, cementing the details into place.

This is where the “smart” portion of the term comes into play: once the smart contract is on the blockchain, the terms of the agreement will automatically execute once the conditions of an agreement are met.

Expanding the use of smart contracts

The benefits of a smart contract are reasonably straightforward: it not only ensures a contract is enforceable and unchanged throughout the course of an agreement, but the automatic nature prevents further disputes. Usually, contracts are agreed to, and then the terms of the agreement must be carried out consciously by the involved parties. It requires a lot of trust, honesty, and due diligence. Smart contracts cut out all the extra work and will likely become more and more common as people come to an understanding of what they are. They are appealing not only because of convenience but also because they ensure the proper execution of a contract as laid about by the parties during the negotiating process without the risk of a party going back on their commitment.

Smart contract example

You sign a contract agreeing to turn over the production of an innovative healthcare device to a healthcare system once they complete payment installments, purchase a specific number of devices, and a long-term employment contract is signed for you to be retained by the healthcare system. In a typical contract world, both parties will have to keep close track of each step in the process, ensuring that the conditions are met. Once the three conditions are met, you will then transfer the production and complete the terms. In a smart contract world, both parties upload all the necessary data involved in the contract, and it is automatically executed when the terms are met. Once the payments and device purchases are complete, and the contract is signed, the smart contract will automatically transfer the production means into the name of the healthcare system.

You can see how this could be convenient and efficient for individuals and businesses alike, regardless of the scale of the contract. It cuts out a lot of work and ensures proper execution without constant monitoring or risk.

These contracts will soon become more common and could raise many legal questions. Like any other contract, they are legally binding as long as the contract doesn’t violate state or federal contract laws. Whatever form your contract takes, it’s important to have a data-driven law firm by your side. CLARK.LAW helps businesses avoid costly legal mistakes. Contact us for all your contract needs.

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