Smart Contracts

Smart contract is one of the latest innovations in the world of technology and cryptocurrencies; an innovation that has a direct and effective connection with the world of law, especially contract law, due to being a “contract” and regulating agreements and transactions between natural and legal persons. In addition to the important role of the computer science and programming skills in the formation and implementation of smart contracts, the legal knowledge is also required in this matter. Therefore, same as concluding other contracts, being consulted by legal experts and a team of professional lawyers can help you reduce the potential risks of a smart contract as effective as possible.

In this regard, Karimi & Associates Law Firm, with a team of qualified advisers, experts, and lawyers in various legal fields, including Financial and Banking Law as well as Cyber Law, by providing specialized legal advice and setting the terms of a contract, accompanies and supports your interests in concluding the smart contracts.

The essence of smart contract

Smart contracts, like any other type of contract, contain the terms and clauses of an agreement or transaction between two or more persons. But unlike traditional contracts, clauses and provisions of a smart contract are coded, regulated, and executed in the Blockchain space. Therefore, in the simplest definition, a smart contract is a set of programmed codes and data in the context of Blockchain technology that facilitate exchanges with financial transactions.

These contracts are designed and programmed in such a way that all or part of them are automatically executed and stored in the Blockchain space. The idea of ​​forming and developing smart contracts is based on the same basis on which Bitcoin was formed; eliminating intermediaries in financial and banking affairs and making international transactions between people easier.

The importance of smart contract

Smart contracts can be used in any field and do not face people with any restrictions in this regard. On the other hand, as soon as they are added to the Blockchain network, it will no longer be possible to change or transform them (except in exceptional cases). These types of contracts allow individuals to enter into various financial transactions from anywhere in the world, including savings, investment, loans and financial facilities, insurance, etc., without the need for a bank or other financial institutions.

In addition, smart contracts with connection to the Blockchain network and the possibility of using new mechanisms such as Uniswap, Compound and USDC will have double importance compared to traditional contracts. Because, for example, a smart contract using the Uniswap mechanism provides the possibility for its parties to trade and transfer specific types of cryptocurrency or digital currencies without the government or its institutions being involved in determining transaction rates. Or, for example, USDC, which is a type of cryptocurrency and is connected to the US dollar using smart contracts, and in the end, in this way, each USDC will have the value of one US dollar.

Therefore, by using smart contracts, you can access a wide range of tools and the latest technologies in the world of capital and financial markets, and in addition, unlike financial activities based on traditional contracts, by using smart contracts, you can take part in financial and banking activities and transactions in the fastest possible way and with the lowest cost.

How the smart contract works

After reaching an agreement between the parties and clarifying the terms and clauses of the contract, the assets, terms and conditions of the contract, subject of the contract, etc. are all coded and placed on the Blockchain platform. The coding of these contracts is done according to a simple and conditional pattern. In such a way that if the first party of the contract fulfills their obligation that is mentioned in the smart contract, then the obligation of the other party, which is also included in the contract in the form of a code, is executed automatically. For example, in a smart contract regarding the sale of an apartment unit, if 300 Tether (a type of cryptocurrency) is transferred from the account of the apartment buyer to the seller’s account in the Blockchain, then the smart contract automatically and immediately transfers the ownership of the apartment to the buyer.

In addition to the above, unlike traditional contracts in which signing is a manual process, in smart contracts the signature of the parties is a digital signature whose security is provided by encryption techniques.

Finally, different copies of the smart contract which is placed on the Blockchain platform and distributed on the network, are placed on different parts of the network and the contract itself will automatically check the fulfillment of the contract clauses by the parties and the implementation of the contract.

Advantages of smart contract

The use of smart contracts has significant benefits for various people, including economic operators in the field of capital and especially cryptocurrencies:

  • High speed and efficiency: the regulation and coding of smart contracts is such that immediately after the fulfillment of the conditions agreed by the parties, the contract is automatically executed. In addition, because these types of contracts are automatic and digital, there is no need to do paperwork and send and transfer paper documents. Furthermore, there is no need to spend time sorting documents or checking and fixing errors in them.
  • Institutionalizing trust and transparency: due to the absence of third parties’ presence and involvement in this type of contract, as well as the possibility of viewing and accessing the transactions of the parties to the contract, the smart contract institutionalizes trust and transparency between the parties.
  • Information security: in a smart contract, all documents and information are coded, which significantly reduces the possibility of them being hacked. In addition, since every data is connected to its previous and subsequent data in the platform of Blockchain and shared ledger, it will not be possible to lose, change or delete it without permission.
  • Saving time and costs: with the use of smart contracts, there will be no need for the presence of intermediate persons and institutions, including banks, notary offices, etc. and therefore, it will lead to a faster and more cost-effective process. In addition, the automatic execution of this type of contracts practically does not allow the parties to disobey their obligations, and therefore, it can significantly prevent the occurrence of legal disputes and lawsuits in the court or other judicial authorities. Consequently, it prevents waste of financial resources and time of the parties to the contract.

Disadvantages of smart contract:

Along with all the perceived advantages of smart contracts, these types of contracts also have significant disadvantages that we need to mention.

  • Possible errors: since the coding of these contracts is done by humans, not machines, the occurrence of errors is inevitable, and beyond that, in the event of an error, due to the fact that the information recorded in the Blockchain cannot be changed or modified, it will not be possible to compensate for the error in the vast majority of cases.
  • Uncertain legal situation and lack of legal transparency: Until now, the legal system of any country has not issued any regulation regarding the smart contracts. Accordingly, concluding these contracts and conducting transactions based on them, would not allow the parties to fully benefit from the legal capacities and protections. However, there has been some regulations regarding the legalization of cryptocurrencies in some countries which is in relation with smart contracts.
  • High costs of coding and programming: Without programming, it will not be possible to conclude smart contracts. In addition, due to the irreversibility of programming errors in this field, it is necessary for the relevant programmer to have high skill and expertise in forming and programming smart contracts, which will increase the costs for the parties.
  • Security problems: despite the high security of the Blockchain network and the encryption of all information in a chained and connected manner, there may be a small vulnerability in a smart contract, and it can be abused by hackers and as a result assets, funds, information, or documents be stolen.

In any case, smart contracts, despite their disadvantages and risks, are currently one of the most important tools in the field of exchange and transfer of cryptocurrencies or digital currencies, and they are developing and expanding all over the world at a high speed. This expansion has also included the borders of our country, and several smart contracts have been concluded in Iran, which shows the inevitable and rapid development of these contracts in the short term. Therefore, it is expected that in the not-too-distant future, smart contracts will replace many types of traditional contracts and mark a new chapter in the world of law.

If you are currently planning to set up and conclude a smart contract, you can contact Karimi & Associates Law Firm through the “contact us” section and receive specialized legal advice in this field from our team of professional advisers, experts, and lawyers.


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