Imagine that you wanted to purchase a car from your neighbor. You open an app and accept a contract. Instantaneously, money is sent to your neighbor and the car is transferred into your possession. Everyone can see that you own the vehicle. Your neighbor doesn’t have to do anything other than send the contract.
This is the future of the blockchain — the incredible benefits of smart contract technology. But it’s also, like most new technology, potentially dangerous and disruptive.
How is a Smart Contract Created?
Smart contracts are created on a blockchain. They are programmed to exchange a given blockchain’s token (such as wrapped Ethereum) under specific conditions. A smart contract can be sent to anyone, anywhere, if you know their address. This also means that smart contracts can technically be sent to those who have no idea that they’re about to receive them. Driven by blockchain, smart contracts have risen into power alongside crypto and NFTs. Binance, Polymatic, and Solana all support smart contracts.
What Are Smart Contracts Used For?
Smart contracts can send and receive money and record transactions on the blockchain. Essentially, though, that boils down to one thing: smart contracts, given a set of conditions, write to the blockchain. That means smart contracts can be used to validate real-life contracts, exchange goods and services, and complete very fast financial transactions.
What Are the Benefits and Limitations of Smart Contracts?
Like crypto, the major limitation of smart contracts is that they’re difficult for the average person to understand and they’re difficult to use. More than cryptocurrency, an individual needs detailed tech knowledge to launch a smart contract. But ideally, smart contracts will become more prevalent and easier to use as time passes.
Smart contracts record transactions. But they cannot influence anything outside of their individual blockchain. That means that additional work has to be done to do things like validate real estate transactions or validate car transactions — even if that work is merely acknowledging that the blockchain provides a real record of contracts.
What is the Relationship Between Contracts and the Blockchain?
Smart contracts are built on the blockchain. This provides for triggering events (such as opening a transaction) as well as for recording events (recording them directly on the blockchain). A smart contract is blockchain technology, but blockchain doesn’t necessarily imply smart contracts. NFTs could be called a type of smart contract, as they do convey ownership to an item in exchange for money.
What is the Legality of Smart Contracts?
A contract, legally, is something that two or more parties agree upon. Consequently, no new laws are necessary for a smart contract to be a type of contract; if it is validated that both parties agreed upon a transaction, then both parties agreed upon a transaction. A car can be sold through a smart contract right now, all that would be necessary (which admittedly is a hurdle) is for the law to understand what a smart contract is and how it operates.
That being said, smart contracts aren’t intended to be a legal venue, at least not yet. A lawyer should be involved if smart contracts are used for anything that is more valuable than a car or more obscure than an NFT.
Smart contracts are very disruptive. Presently, someone can borrow money, buy an NFT from themselves, and then send that money back within milliseconds. That may not seem helpful, but people have borrowed millions of dollars to buy their own NFT (in a fraction of a second) thereby boosting the value of their NFTs.
Start to dig deeper and you can see how smart contracts could be disruptive. Because they aren’t regulated (and can’t be regulated) they can give illusions of profitability where there isn’t one. People who work with smart contracts need to be tech-savvy and knowledgeable due to the potential complications and ramifications.