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Smart Contracts Vs. Traditional Contracts


Contracts are often looked upon with disdain because they are the source of so many business and legal conflicts. However, when contracts lead to discord it is often due to the fact that they were not drafted well or there was a massive communication breakdown that lead to oversight issues. In an effort to avoid convoluted contract disputes, attorneys and other business professionals have been looking for ways to revolutionize business arrangements that still carry the force of the law. A prime example of this is the emergence of smart contracts, which are basically computer-generated agreements. Here is a look at the difference between a regular old contract and the allegedly smart version:

A Contract at its Core

The core of a contract is that it formalizes an agreement between one or more parties. The parties to the agreement usually commit to performing some action in exchange for something of value, which in contract language, is called consideration. In general, one party performs a service or provides a good and the other party renders payment in exchange for receiving the good or service. Of course, contracts have evolved and are continuing to do so, especially given the advent of technology, but the nuts and bolts of them have more or less stayed the same.

Traditional Contracts

Traditional contracting generally involves one or more companies, a gaggle of lawyers, several rounds of negotiations, back and forth drafting phases, and then the often lengthy administration of the finalized agreement. The outcome of the negotiations and drafting process is always a detailed document that is signed by all relevant parties, and it often contains various attachments, addenda, and amendments. Of course, prior to the digital age, there were paper copies of these agreements that were stored in file cabinets, but nowadays, most versions are no doubt created and stored electronically, ideally in a sophisticated contract management system.

Smart Contracts

Smart contracts are so named because, as with many technology-derived solutions, they are the product of computer programming. These computer programs, also called blockchain contracts or digital contracts, create and enforce an agreed upon performance between two parties, much like the traditional counterpart. The difference, of course, is that smart contracts are computer-generated and thus it is the code itself that explains the obligations of the parties. In many cases, the parties to a smart contract are essentially strangers on the internet bound by this digitally-produced but binding agreement. The goal is obviously to facilitate business arrangements without the formality and cost associated with the traditional route.

The Future of Contracts

Although people within the tech industry would no doubt proclaim smart contracts as the wave of the future, it is unlikely that they will ever completely replace the traditional versions. Smart contracts may make sense for brief, one-off transactions, but for longer relationships and high value deals, it is unlikely that businesses would be willing to forego the legal recourse that a traditional contract affords. Nonetheless, it would not be surprising to see some kind of melding of the two agreements, allowing for faster, simpler arrangements to be established digitally, yet also providing an avenue for judicial review.

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