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.

Another field for the application of smart contracts lies with escrow agents digitally confirming that a certain condition in the real world has been triggered and thus serving as a trigger for an automated action, eg a payment.

Smart contracts could also allow information in public registries of, for example, property ownership, population and voters to be stored publicly and safely on the blockchain. Airlines could implement a settlement system for airline passengers regarding their rights, paying out compensation automatically upon delays, thus reducing staffing costs. Further applications could, for the execution of certain compliance tasks, involve the formation of decentralised autonomous organisations, ie organisations whose bylaws are a bundle of smart contracts, thus allowing a set of governance rules to be automatically enforced and executed via the underlying blockchain technology.

With a smart contract, there is only one set of trade terms, predefined as code and self-executing upon the triggering event, such as a payment being made, reducing misunderstandings on contract terms and dependencies on the other party’s performance.

But smart contracts also have downsides. For example, deliberate ambiguity in a contract is not possible. So clauses involving terms like ‘bona fide’, ‘using best efforts’ or ‘to the extent possible’ can not be implemented as code and can therefore not be part of a smart contract.

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