Pros and Cons of Smart Contracts

There are many applications to help things run smoother in the financial sector. The Smart Contract is one of them. It allows performing credible transactions without associating with third parties. Today, we discuss the Pros and Cons of Smart Contracts.

This article was written on November 2nd, 2017, and updated on the 12th of September 2019.

AtoZ Markets - Before we dive deeply into explaining the pros and cons of smart contracts, it's important that we define what it means. This will help you get a better understanding of how it can truly revolutionize the world we live in.

What are Smart Contracts?

A smart contract is a digital form of agreement stored in the blockchain. When conditions are met, it automatically facilitates, verifies or enforces negotiations without the intervention of thirds parties.

With smart contracts, you can exchange anything of value - money, properties, shares - in a transparent and trouble-free way without needing the services of a middleman. This idea of smart contracts was first introduced by Nick Szabo in 1997.

How do smart contracts work?

The main principle of smart contracts may be compared to how vending machines operate. They follow only the instructions given to them. The coded assets and contract terms usually put into a Blockchain.

Between the nodes of the platform, the contract is distributed and copied multiple times. The contract is performed in accordance with the contract terms after the trigger happens. The program checks the implementation of the commitments automatically.

Smart Contracts carry with them all the benefits of Blockchain technology and allow for automation. The emergence of Ethereum put smart contracts into operation for everyone, giving further impetus to deal-making.

Without further ado, let's discuss the pros and cons of smart contracts.

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Pros and Cons of smart contracts

Advantages of smart contracts

Since smart contracts run on Blockchain technology, they provide security, economy and speed, and standardization.

  • Security: The smart contract is encrypted and distributed among nodes. Specifically, this guarantees that it will not be lost or changed without your permission.
  • Economy and speed: The contracts have automated processes and most eliminated intermediaries.
  • Standardization: There is a wide range of smart contracts nowadays. You can choose one and change it according to your needs.

Disadvantages of smart contracts

Smart contracts aren't perfect! The following are the obstacles smart contracts couldn’t avoid.

  • Human factor: People who write the code can make mistakes. If the smart contract is in the Blockchain, it doesn't change. A good example of a human error is The DAO. Thus, developers’ mistakes in the code proved costly for the users and some hackers exploited errors and stole about $60 million.
  • Uncertain legal status: Currently, no government is regulating smart contracts. As a result, there is a potential issue if governmental institutions decide to make a legislative framework for smart contracts.
  • Implementation costs: Smart contracts cannot be performed without programming. It is very important to have an experienced coder on the staff to make fail-proof smart contracts and adopt the internal structure of the company for Blockchain technology.

Now that we have discussed the pros and cons of smart contracts, let's look at where they can be applied.

Smart Contracts Application

Smart contracts can be applied in different fields such as:

  • Elections: Voting procedures can be complex. However, when voting results are put in the Blockchain and distributed among the nodes of the network, they remain anonymous. They will also eliminate any manipulation with the ballot.
  • Logistics: The supply chain includes a lot of links. In addition, each link has to get a confirmation from the previous one, holds up its end of the contract and send the information further. Also, it takes a lot of time to do the work on time. Also, smart contracts ensure transparency in the contract terms as well as fraud protection.

There are some other possible applications, i.e. in management, bank system, insurance, estate, IoT, and others.

How Can Smart Contracts Be Enforced?

For creation, a smart contract needs the following:

  • The subject of the contract: The program must have access to goods or services to lock and unlock them automatically.
  • Digital signatures:  All the participants sign the contract with their private keys.
  • Contract terms:  Terms of a smart contract take the form of an exact sequence of operations. All participants must sign the given terms.

Most Blockchains in 2019 implement smart contracts nowadays to varying degrees. Different projects facilitate smart contract implementation. They vary in their possibilities, diversity of smart contracts templates, and require programming skills. Nowadays such platforms improve, develop and evolve towards:

  • Complete support of deals: The support team will help solve problems and questions.
  • Being suitable for non-programmers: Most platforms need programming skills or services.
  • Arbitration availability: Conflict resolution is a weak point for a lot of platforms. The involvement of the third party requires additional waste of time and resources.

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