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Smart contracts are nifty lines of code that work almost like magic. These codes contain business logic that executes pretty much anything from transferring funds to registering assets and everything in-between.
Based on how they work, smart contracts have a lot of potential in the legal industry. Their simple operating principle of "if/when...then..." means legal practitioners and even businesses can program them to complete legal agreements when a certain criteria is met.
For instance, the smart contract can release a title deed to someone immediately after payment is made. No more long legal processes or red tape.
This is just one example of smart contracts for legal agreements. In this article, we’ll examine what smart contracts are and how they can work in legal scenarios.
What Are Smart Contracts?
Smart contracts are virtual agreements that run on blockchains, meaning that all participants have equal access to the same information. These smart contracts have the provisions of an agreement coded and can perform such actions when certain conditions are met. Smart contracts in legal agreements help increase dependability and decrease the possibility of disputes.
According to Ark Invest, the smart contract market is estimated to climb up to $5 trillion in the next decade. This growth may take a figure of more than 450 billion US dollars in annual fees if the trend is able to move ahead.
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Pros of Smart Contracts as Legal Agreements
There are numerous advantages to using smart contracts as legal agreements; here are some of them:
- Cost Efficiency: Smart contracts are easy to produce as there is no need for middlemen such as lawyers or notaries, which are expensive when it comes to contract execution. Currently, the average take rate that the financial services industry levies is approximately 3.3%, which smart contracts could reduce.
- Speed and Efficiency: These contracts can also perform transactions as soon as some conditions are fulfilled. This speed is particularly appropriate in such sectors as finance and transportation. Efficiency of cross-organizational work is one of the main benefits of such automation because it maximizes operation cost savings.
- Transparency and Security: Smart contracts on blockchain are secure, change is not possible after deployment, and they are impressively tracked.
Cons of Smart Contracts as Legal Agreements
Despite their numerous advantages, smart contracts face several challenges.
- Legal Recognition: While smart contracts are gaining legal recognition in some parts of the world, the legal landscape is still evolving, and not all jurisdictions have well-developed rules addressing smart contracts. Even with such modern laws as the ESIGN Act in the United States, many state laws are still wanting.
- Technical Complexity: Using smart contracts presents programming problems since not many organizations can write accurate smart contracts with the required coding expertise. Also, commonly using third-party data resources called “oracles” introduces trust issues against the concept.
- Rigidity: Smart contracts, once written and put into operation, can only be altered when a new smart contract is agreed and created. However, this rigidity can be a problem in conditions that change regularly, as they cannot recognize the subtleties of human intent.
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Use Cases of Smart Contracts as Legal Agreements
Now, let’s look at some examples of smart contracts in legal agreements. The amazing part of all these is that there are a number of real-word instances of smart contracts in action outside the usual cryptocurrency usage.
- Smart Contracts for Real Estate: In 2016, Cook County in Illinois used smart contracts to transfer property titles upon receipt of payment. Each buyer received a digital token that they hold as proof of ownership.
- Smart Contracts for Insurance: Insurance companies have also used smart contracts to make payouts easier. For instance, Lemonade Insurance uses a smart contract in its blockchain-based crop protection program. Whenever there's bad weather or a natural disaster, the smart contract immediately triggers payouts to affected farmers who are beneficiaries.
It's worth noting that these are emerging use cases and not yet universally adopted.
Conclusion
Smart contracts in legal agreements are expected to expand their use case in the future at a high rate. Companies and industries have begun to realize their capacity to implement systems that would reduce the intricacies involved in business processes.
Continuous developments in blockchain are also creating more possible use cases. The real estate and insurance automations are good examples of smart contract versatility.
