Pros & Cons of Smart Contracts
These contracts already possess multiple advantages over traditional arrangements. This number is likely to increase in the future as the technology improves.
For now, here are ten benefits to using them:
One of the primary requirements of a smart contract is to record all terms and conditions in explicit detail.
This is a requirement because an omission could result in transaction errors. As a result, automated contracts avoid the pitfalls of manually filling out heaps of forms.
The terms and conditions of these contracts are fully visible and accessible to all relevant parties. There is no way to dispute them once the contract is established.
This facilitates total transparency of the transaction to all concerned parties.
The need for accuracy in detailing the contract results in everything being explicit. There can be no room for miscommunication or misinterpretation.
Thus, smart contracts can drastically cut down on efficiency lost to gaps in communication.
These contracts run on software code and live on the internet. As a result, they can execute transactions very quickly. This speed can shave hours off many traditional business processes as there is no need to process documents manually.
Automated contracts use the highest level of data encryption currently available, which is the same standard that modern crypto-currencies use. This level of protection makes them amongst the most secure items on the world wide web.
A natural byproduct of the speed and accuracy of these contracts is the efficiency with which they operate.
Higher efficiencies result in more value-generating transactions processed per unit of time.
Businesses across the globe are becoming increasingly conscious of their impact on the environment. Smart contracts can contribute to a cleaner environment as they live and breathe in the virtual world. This removes the need for vast reams of paper and saves costs typically spent on intermediaries.
These contracts record essential details in each transaction. Therefore, anytime your details are used in a contract, they are permanently stored for future records.
In the event of data loss, these attributes are easily retrievable.
Perhaps one of the most significant advantages of automated contracts is that they eliminate the need for a vast chain of middlemen.
With smart contracts, there’s no need for lawyers, witnesses, banks and other intermediaries.
Smart contracts generate absolute confidence in their execution. The transparent, autonomous, and secure nature of the agreement removes any possibility of manipulation, bias or error.
Once solemnized, the contract is executed automatically by the network.
Another attractive feature of these contracts may be the potential to reduce significantly or even eliminate the need for litigation and courts.
By using a self-executing contract, parties commit themselves to bind by the rules and determinations of the underlying code.
There are several industries where widespread smart contract adoption would reap the most benefits. For example, various governments worldwide have tested smart contract pilot programs to help eliminate burdensome manual paper filing associated with dated real estate transactions.
Smart contracts could also help ensure the security of sensitive patient data in the healthcare industry while ensuring the information's accuracy to avoid erroneous diagnoses. Also, smart contracts could automate several time-consuming tasks in the accounting and finance industry involving number crunching.
Other industries that may benefit from smart contracts include:
- Startups
- Venture Capital
- Education
- Insurance
- Warehouse
- Supply Chain
- Transport & Logistics
- Charities
- Travel & Tourism
- Agriculture
Presently, there are several practical limitations of smart contracts preventing them from reaching mainstream use.
Lack of ability to change
First, amending or terminating a contract is significantly harder, or in some cases impossible, than doing the same with text-based contracts. Parties can quickly draft an amendment to a text-based contract when a law changes or an unexpected event occurs. However, given that blockchains, where smart contracts reside, cannot be changed, modifying a smart contract is far more complicated. This drawback potentially yields higher transaction costs as opposed to using traditional contracts.
Few remedies for breach
Furthermore, smart contracts have issues with allowing parties to elect for self-help remedies when a contract is breached.
Limitations on negotiations
The objectivity and automation inherent in smart contracts can foil how parties actually negotiate contracts. For instance, a party may decide it is beneficial to leave a provision more ambiguous so to later argue that the provision should be interpreted in their favor if or when an issue arises. Smart contracts do not allow for the same level of ambiguity. Smart contracts demand exact parameters. Consequently, parties may elect for text-based contracts for complex agreements due to high transaction costs associated with negotiating those contracts.
Security
As previously discussed, smart contracts also present the added risk that the contract can be hacked and financially exploited. Parties may find added insurance in knowing a text-based contract cannot lead them to financial ruin.
Outside data
Another technical problem occurs when provisions are inserted into a smart contract requiring the smart contract to receive information from off-chain resources, data from resources not on the blockchain itself. For example, a crop insurance smart contract is programmed to transfer money to an insured party if the temperature falls below 32 degrees. In this case, a significant problem arises because smart contracts cannot pull data from off-chain resources. Rather, that information must be entered into the smart contract.
Oracles, which are trusted third-party information sources, can cure this problem by inputting this information at predetermined times; however, adding a third party to the smart contract process presents the residual problem of diluting the decentralized experience of smart contracts.