An introduction to smart contracts

With the rise of blockchain-based businesses has come the emergence of the smart contract, but what exactly is this and how does it work? In this article, we offer a brief overview of the smart contract.

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What is a smart contract?

We all know that a traditional contract takes the form of a signed legal document that contains certain terms to which both parties have agreed. The parties are bound by the terms of the contract and there is usually redress available for any breach.

A smart contract does away with the need for a physical document. While it remains an agreement between two or more parties, it is written in computer code; in essence, the requirements of the contract are built into the business processes, with fulfilment of the contract’s terms automated. Examples of how the smart contract can be used in the commercial world include the digitisation of assets, personal finance products, and supply chain management.

What are the advantages and limitations of the smart contract?

The automation of the smart contract takes away the need for direct human supervision by a manager or other middleman. The smart contract is self-executing, which means it does not require the involvement of a central authority or enforcement mechanism. The very nature of smart contracts takes the element of trust away from other parties to the contract and moves it to the software and the programming of this software.

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Of course, not all businesses will want to replace their traditional contracts with blockchain-based smart contracts. For one thing, traditional contracts have legal underpinnings that offer a route to redress, which might make organisations think twice about using a smart contract for a high-value deal or for a longer-term contractual relationship. Some people also prefer the human element of the contract process.

For businesses that want to harness the benefits of digitisation and software to make their current processes more efficient, using a contract management system from a specialist such as can provide a way to centrally store contract documentation and information.

As blockchain moves increasingly into the mainstream, the demand for smart contracts is only going to grow. While not all businesses will want to switch to blockchain-based automation, there are software solutions out there that can still streamline traditional contract management.


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