Smart Contracts
Smart contracts are one of the newest innovations in technology and cryptocurrencies. By functioning as a ‘contract’ and regulating agreements and transactions between individuals, they have a direct and effective connection with the world of law, especially contract law. Computer science and programming skills play a significant role in forming and implementing smart contracts, which is complemented by the impact of legal science and contract law.
Like other contracts, it is crucial to leverage the expertise and skills of a lawyer or legal team in this type of agreement to minimize risks. In this context, Karimi & Associates Law Firm, with a team of attorneys with expertise and experience in various legal matters, including financial and banking law, as well as cyber law, will assist and support your interests in the preparation of smart contracts by providing specialized legal advice and drafting the contract terms, significantly reducing the associated risks.
The Nature of a Smart Contract
Smart contracts, like any other contract, contain the terms and conditions of an agreement or transaction between two or more parties. However, unlike traditional contracts, the terms and conditions of a smart contract are written in code and regulated and executed within the blockchain space. This unique feature ensures a high level of security, as the blockchain is inherently resistant to modification. Therefore, a smart contract is a set of programmed code and data on the blockchain technology platform that provides a secure environment for financial transactions, offering a reassuring level of protection.
These contracts are designed and programmed with immense potential, so that all or part of them is automatically executed and stored in the blockchain. The concept of forming and developing smart contracts is based on the same foundation upon which Bitcoin was created: eliminating intermediaries in financial and banking activities and enabling international transactions between individuals.
The Importance of Smart Contracts
Smart contracts, with their wide-ranging applications, do not impose restrictions on individuals. Once added to the blockchain network, they become immutable, except in exceptional cases. These contracts provide a secure platform for individuals to engage in various financial transactions, including savings, investments, loans, economic facilities, and insurance, from anywhere in the world. The beauty is that these transactions can be conducted without a bank or other financial institutions, ensuring the utmost security of your financial dealings, giving you peace of mind and confidence.
When connected to the blockchain network and utilizing new mechanisms like Uniswap, Compound, and USDC, smart contracts gain a distinct advantage over traditional contracts. For instance, a smart contract using the Uniswap mechanism, a decentralized protocol for automated liquidity provision on Ethereum, enables its parties to trade and transfer specific types of cryptocurrencies or digital currencies without government interference in setting the transaction rate. This autonomy is a crucial feature; for example, it ensures that each USDC, a type of cryptocurrency tied to the US dollar through smart contracts, will be worth one US dollar, making transactions swift and seamless.
Therefore, smart contracts provide access to various tools and the latest technologies in capital and financial markets. Additionally, unlike financial activities based on traditional contracts, smart contracts enable individuals to perform financial and banking activities and transactions in the fastest and most cost-effective manner possible.
How does a smart contract work?
After an agreement between the parties, the contract’s terms and conditions and its assets are coded and placed on the blockchain. These contracts follow a simple conditional pattern. Thus, if the first party fulfills its obligation as outlined in the smart contract, the other party’s obligation, which is also coded in the contract, is executed automatically. Smart contracts, known for their robust security, have various applications, from financial services to supply chain management. For instance, in a smart contract concerning the sale of an apartment unit, if 300 Tethers (a type of cryptocurrency) are transferred from the buyer’s account to the seller’s account on the blockchain, the smart contract automatically and immediately transfers ownership of the apartment to the buyer.
In addition to the above, unlike traditional contracts, where signing is a manual process, in smart contracts, the parties’ signatures are digital signatures. These digital signatures, secured by cryptographic techniques, provide an unparalleled level of security.
Once a smart contract is deployed on a blockchain platform, it is automatically distributed across the network. This platform plays a crucial role in ensuring the contract’s integrity and security, as it checks for the fulfillment of contract clauses by the parties and executes the contract.
Advantages of Smart Contracts
Smart contracts have significant benefits for various individuals, including those active in the capital field, especially in cryptocurrencies. These include:
High speed and efficiency
Smart contracts are structured and coded to execute automatically, immediately after the agreed-upon terms are met. These contracts are not only efficient but also secure, being digital and eliminating the need for paper documents. This modern approach to contract management saves you from the hassle of paperwork and error review, making you more productive.
Institutionalizing trust and transparency
Due to the lack of presence and interference of third parties in this type of contract, as well as the possibility of viewing and accessing transactions by the contracting parties, smart contracts institutionalize trust and transparency between the contracting parties.
Establishing information security
In a smart contract, all documents and information are encoded, which significantly reduces the possibility of hacking them. In addition, since in the blockchain and distributed ledger platform, each data is connected to its previous and subsequent data, there is no possibility of its loss or unauthorized modification or deletion.
Saving time and money
Smart contracts, by their very nature, eliminate the need for intermediary individuals and institutions, such as banks and notaries. This not only speeds up the process but also ensures the automatic execution of the contract, leaving no room for parties to deviate from their obligations. This feature plays a crucial role in preventing legal disputes and lawsuits, providing a sense of security for your financial resources and the time invested in the contract.
Disadvantages of Smart Contracts
Along with all the perceived advantages of smart contracts, these contracts also have significant disadvantages that need to be mentioned.
Possibility of error
Since humans, not machines, code these contracts, the possibility of error is inevitable. Furthermore, if an error occurs due to the immutability of the information recorded in the blockchain space, it will be impossible to compensate for the error in most cases.
Uncertain legal status and lack of legal transparency
Currently, no country’s legal system has addressed the issue of smart contracts by establishing specialized regulations. However, regulating these contracts and conducting transactions based on them could potentially enhance the parties’ ability to benefit from legal capacities and protections fully.
High cost of writing
Smart contracts cannot be concluded without programming. Given the irreversible nature of programming errors in this area, the programmer must have extensive skills and expertise in creating and programming smart contracts, which will increase costs for the parties.
Security issues
Despite the high security of the blockchain network and the encryption of all information in a chained and interconnected manner, a small vulnerability may exist in a smart contract and be exploited by hackers, resulting in the theft of funds, information, or documents.
Despite their risks, smart contracts are rapidly becoming one of the most important tools for cryptocurrency and digital currency exchange. Their global expansion, including several smart contracts being executed in Iran, underscores the inevitability of their rapid development. It is certain that in the not-too-distant future, smart contracts will not only replace many traditional contracts but also usher in a new era in the world of law.
If you plan to draft and conclude a smart contract, you can contact Karimi & Associates Law Firm through the Contact Us section and receive specialized legal advice from the firm’s expert lawyers.