The concept of smart contracts is primarily based on the idea of blockchain technology. A blockchain is a decentralized network of a growing list of records (blocks) that are linked through cryptography. A blockchain network does not include a single central point like a conventional database.
The application of smart contract can greatly reduce transaction costs and improve transaction efficiency. The existing smart contract are expensive, single application scenario and inefficient. This paper aims to propose a new smart contract model to solve these problems.
We are at the nascent stages of smart contract adoption, best practices for implementing such code is still evolving. However, the checklist below should help developers design effective smart contracts and guide companies who plan to use them.
- For now, parties entering into any type of contractual arrangement would be best served using a hybrid approach that combines text and code. As noted, there are strong arguments that code-only smart contracts should be enforceable, at least under state contract law in the U.S. However, until there is greater clarity on their validity and enforceability, code-only smart contracts should be used only for simpler transactions. Parties will continue to want text-versions of agreements so they can read the agreed-upon terms, memorialize terms that smart contracts are not equipped to address and have a document they know a court will enforce.
- In a hybrid contract using text and code, the text should clearly specify the smart contract code with which it is associated, and the parties should have full visibility into the variables that are being passed to the smart contract, how they are defined and the transaction events that will trigger execution of the code.
- When relying on oracles for off-chain data, the parties should address what would happen if the oracle is unable to push out the necessary data, provides erroneous data or simply goes out of business.
- The parties should consider risk allocation in the event of a coding error.
- The text agreement accompanying the code should specify the governing law and venue, as well as the order of precedence between text and code in the event of a conflict.
- The text agreement should include a representation by each party that they have reviewed the smart contract code, and that it reflects the terms found in the text agreement. Although such a representation cannot force a party to examine the code, it will help the counterparty defend against a claim that the code was never reviewed. Parties may also choose to insure against the risk that the code contains errors. As noted, parties may need to involve third-party experts to review the code.
More detail: https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/
A smart contract is a type of blockchain record that contains externally written code, and controls blockchain-based digital assets. When triggered by a specified blockchain write event, a smart contract immutably executes its code and may result in another blockchain event.
Smart contracts are neither smart nor contracts, and can only read from, and write to, the blockchain. All off-chain interactions with smart contracts must be handled by agents that map between off-chain assets and on-chain digital assets.
Smart contracts are perfectly suited for agreements between two parties without third-party validation, such as trading in over-the-counter derivatives and the execution of contracts when the triggering event can be measured digitally, eg digital payments, changes in public registries and weather information as published by an official source.
Swift developments in the emerging field of blockchain technology have facilitated the birth of ‘smart contracts’: computerised transaction protocols which autonomously execute the terms of a contract.
Smart contracts are disintermediated and generally transparent in nature, offering the promise of increased commercial efficiency, lower transaction and legal costs, and anonymous transacting.