Smart Contracts – The Future?

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Smart Contracts
While still being in an infancy stage, the Smart Contracts show a lot of promise in their future applications and uses. Through this Article, the Author explains as to how the smart contracts can make way for execution of key contracts by businesses in the future.
Smart Contracts

SMART CONTRACTS...
THE FUTURE?

Coined in 1990s by the Computer Scientist, Lawyer and Cryptographer Nick Szabo, the term means a self-executing computer protocol, with the terms of agreement between the parties to the contract written in the form of a software code. The Protocol is intended to automatically execute, control or document legally relevant events and actions in accordance with the terms of agreement.

A simple vending machine can be said to be simple most example of a smart contract where the contract to sell a can of cold drink is executed automatically on input of coins and press of a button. However, due to technological, infrastructure and safety constraints, the advancement of them was at a very undemanding pace.

However, with the advancement of the Blockchain technology, the usage of Smart Contracts has progressed beyond borders and promising the potential to solve the problems that haven’t been solved before.

Blockchain and Smart Contracts

Blockchain is the underlying technology that is being used in advancement of Smart Contracts to the next level. Blockchain means a distributed public ledger with one main feature- it has no central authority. It is completely decentralized and a copy of data is stored on every participant of the chain called as a ‘Node’.

Blockchain simply means a chain of blocks that contain information. Each block contains data, hash of the block and hash of the previous block (Hash means a fingerprint or ID associated to the block). Since each Block contains the Hash (ID) of the previous block, the blocks are immutably linked. When someone tampers with any data stored on a block, it automatically alters its hash, resulting in breakage of chain, rendering the tampered block invalid. And since the original block is decentralized, and since the copy of block is stored on every node (participant/ user) in the chain, the original block can always be retrieved using the hash (ID) of the Block.

Smart Contracts

In a smart contract, an asset or currency is transferred into a program. The program runs the code of the Contract and later at some pre-determined point, it automatically validates the conditions to be satisfied by the parties under the Contract. And, based on satisfaction of the Conditions, it automatically determines whether the asset should be transferred, or whether it should be immediately refunded to the person who sent it or some combination thereof. And when such Smart Contract is stored in a block on a Blockchain, it makes it tamper proof, gives it security, and makes it immutable. Self-Verification, Immutable, and Self-Execution are the three main properties of smart contracts.

Smart Contracts by their nature facilitate three functions: It stores rules, it verifies the compliance with the rules and thirdly it is self-executory.

For example, I may want to rent out my car as I am not using it regularly. Traditionally, I would have two problems:

1. Trust and

2. Intermediary costs

If you want to take my car on a rental basis, I would not know if you would pay me, and you would not if I will hand over the keys of the car to you if you pay me before getting the keys. And if there is any trusted intermediary who solves these problems (something like Zoomcar or other such service) their costs may be too much to bear.

When you do this using a smart contract, make payment using cryptocurrency, the money is stored in a virtual contract to which you get a receipt. And if I don’t send you the digital passcode which starts the Car on time, the smart contract automatically refuses to release your money to me, and it refunds your money to your account. At the same time, if I send the digital passcode first and you fail to transfer the money, it automatically refuses to release the key to you, and refunds the same back to me. Its only when all the parties to the contract satisfy their obligations, the contract is verified and executed automatically. It works on if-then premise and is witnessed by hundreds of participants on the blockchain. So, you can expect a faultless delivery. If you receive the key, it automatically makes sure that I receive my money from you.

Benefits and Applications of Smart Contracts

Applications of Smart Contracts

Smart Contracts can be used to solve multiple problems such as

  1. Data Storage- Census, Voter Lists, Votes;
  2. Facilitating Trust- Peer to peer lending, Aggregating and preventing sub-par utilization of resources such as aggregation of small farms or urban lands for farming; Aggregation of unused cars for other purposes, etc.;
  3. Functioning as a Repository- Blood Donor Lists, Organ Transplant Syndication;
  4. Self-Authentication- Tamper Proof Identification, Rethinking Aadhar Card, etc;
  5. Building Decentralized Networks- Avoiding the central authority from monopolization, and unfair regulation.

Benefits of Smart Contract

  1. Autonomy: The need of any intermediary or systems for execution of contracts is eliminated.
  2. Trust and Security: The contract is stored on a Distributed Ledger, making it impossible to tamper with.
  3. Backup: The data is backed up multiple times over the nodes on the network and can be retrieved anytime from anyone.
  4. Speed: Elimination of paperwork saves a lot of time.
  5. Savings
  6. Accuracy and error free

Legal Status of Smart Contracts

While a smart contract may be used for many other purposes other than documentation of any agreements, and that they need not necessarily be just a contract in real sense, the concept of smart contracts is rooted in basic Contract law.

Belarus, in 2017 has become the first country to legalize the smart contracts by implementing the statute named ‘Decree on Development of Digital Economy’.

In 2018, a US Senate report said: “While smart contracts might sound new, the concept is rooted in basic contract law. Usually, the judicial system adjudicates contractual disputes and enforces terms, but it is also common to have another arbitration method, especially for international transactions. With smart contracts, a program enforces the contract built into the code. A number of states in the US have passed legislation on the use of smart contracts, such as Arizona, Nevada, Tennessee, and Wyoming.

Indian legislation, by definition of a contract also includes the Smart Contracts and Section 5 and 10 of Information Technology Act, 2000 legally accept Digital Signatures and find contract enforceable by electronic means. It can be observed that many countries are either in the process of passing new legislations or re-shaping its existing legislations to facilitate and govern the usage of smart contracts.

The Future?

While still being in an infancy stage, the Smart Contracts show a lot of promise in their future applications and uses. The application of Smart Contracts can be seen in IOT applications, Agriculture, Insurance, Real Estate, Healthcare, Finance, Banking, Supply Chain Management, Automation, Trading, Stock Markets, Derivative Markets, Governance, Voting and Procurement of Public Opinion. The possibilities seem endless, and its only a matter of time before we see the Smart Contracts going mainstream.

CS Sharath Chandra, is the founding partner of M/s Sharath & Associates, Company Secretaries who is an young company secretary in practice from Hyderabad. His area of practice includes Drafting agreements for Corporate Investments, Foreign Direct Investments, Corporate Structuring, Strategising and execution of Mergers and Acquisitions, Corporate Compliance Management, Advisory in relation to Corporate Insolvency, Appearance before National Company Law Tribunal etc, apart from consultation under the Corporate Laws of India. You may also reach him at srmassociates.cs@gmail.com or may call on +91-8885114757.

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