Is the paper contract dead?

Whether we’re talking about Web3, blockchain technology, non-fungible tokens (NFTs) or cryptocurrency, the topic of smart contracts comes up again and again.

Smart contracts are said to be self-executing, cheaper, reliable, transparent, secure and borderless and rely less on lawyers and legal teams than traditional contracts do.

This article will discuss what a smart contract is and what brands should know about them.

Smart Contracts for CTOs, CMOs and other leaders

Understanding Web3 – and with it smart contracts – means being knowledgeable about:

Blockchain Technology Crypto Currency Crypto Wallets Decentralized Applications (dApps) The Metaverse Virtual Reality (VR) Augmented Reality (AR)

No one expects CTOs, CMOs and other leaders to be programmers, web developers, network engineers, software developers or crypto experts – but they need to understand these technologies and how people use them, as smart contracts can impact customers , employees and supply chain vendors.

Many may question how brands can use smart contracts other than as part of Web3 efforts. Forward-thinking leaders envision brands using smart contracts as part of loyalty rewards programs, for selling NFTs (such as Taco Bell, Louis Vuitton, Nike, and Tony Hawk, to name a few) and for simplifying contacts between content creators, products, and consumers .

“Marketers can absolutely use smart contracts to maximize brand exposure, and the possibilities are fascinating,” said attorney Tal Lifshitz, a partner and co-chair of the cryptocurrency, digital asset and blockchain group at Kozyak Tropin & Throckmorton in Miami.

“As just one example, imagine a smart contract that could start playing an ad, but only if certain conditions are met, such as a number of viewers on a stream, or number of hits on a website, thereby maximize viewers. I think all marketers are very interested in that.”

Related Article: Is Web3 a Buzzword? Or the Real Deal?

What is a smart contract?

We know that a smartphone is a mobile phone with additional functionality, such as game applications, GPS, web browsing, chat functions and more. But given that a contract is simply words, whether digital or on paper, what is a “smart contract?”

Smart contracts, similar to traditional contracts, contain the terms of an agreement. However, the former’s terms are established and executed as code running on a blockchain. Smart contacts are also sent and received without the need for a “trusted intermediary” such as a bank, government entity, corporation or individual, making it possible to securely automate and decentralize almost any type of agreement. A blockchain offers smart contracts with reliability, security and limitless accessibility.

Ryan Boder, CMO and core contributor at API3, a first-party oracle solution provider that enables Web3 applications to call any web API directly from a smart contract, is in a unique position to talk about smart contracts.

Boder told CMSWire that a smart contract is essentially an agreement between multiple parties that is executed automatically and reliably so that the parties do not need to trust each other or any third-party intermediary. This leads to the exchange of value – and this can be anything from the transaction of digital tokens, automation of workflow or a unique user experience. Smart contracts are the foundation of anything else that is possible within the world of Web3.”

Real and digital applications

The reason smart contracts are called “smart” is because they define the terms of a transaction or agreement. When those conditions are met (ie receiving a trigger or event), they execute and perform their assigned tasks automatically.

A real-life example would be that of a buy-here-pay-here car lottery. When the car lot enters into an agreement with a buyer, they agree that when the car is paid for in full, the buyer will receive the vehicle’s title. With a smart contract, when the final payment is collected, the title is automatically sent to the buyer without the need for any human intervention.

Smart contracts bring new opportunities for people to borrow, buy, sell and trade. Unlike traditional financial apps, decentralized finance (DeFi) dApps are not limited to certain hours, as “market hours” are 24/7. In addition, dApp users can participate without the requirement of centralized custody or fees from intermediaries.

Gaming is another area where brands are using smart contracts. NFTs are unique digital assets used to represent in-game content. Unlike traditional gaming apps where players spend money to unlock access to in-game assets or game configurations, NFTs are owned outright and facilitate the ability to save in-game purchases, sell them to other game players, or transfer to other supported games.

As for traditional contracts, smart contracts can perform the same functionality, albeit at a much lower cost in most cases. Smart contracts can function as legally binding contracts, just as digital and paper contracts do today. Some states, such as Arizona and California, already allow the use of smart contracts as enforceable legal agreements, including marriage licenses.

Mitchell Amador, CEO and founder of Immunefi, a bug and security services platform, spoke with CMSWire about smart contracts and how he foresees them making a big impact on the economy.

“Smart contracts are a huge step forward for business processes and automation,” Amador said. “We fully expect them to transform the economy by making it easier for businesses to connect their core processes in a peer-to-peer way. Smart contracts can be used for trading, investing and borrowing, but they can also be used in other used in areas such as voting rights, health care and property.”

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Related Article: A Guide to NFTs: What Brands Need to Know

What do all smart contracts have in common?

Smart contracts essentially consist of three components.

The first: The signatories, the parties involved in the smart contract. Smart contracts use digital signatures to approve or disapprove the contractual terms. A person’s crypto wallet is used to “sign” the agreement. The second: The subject of agreement or contract. For example, a person may agree to buy a specific amount of Bitcoin. The third: The specific terms involved, that is, the current Bitcoin price is $40.617 per BTC, and a person agreed to buy $500 worth of Bitcoin, so they will receive 0.01183281 BTC in return.

In addition, all smart contracts have some characteristics in common. They are part of a blockchain, so they have state that exists across the entire network. Each node running the blockchain has a copy of the state of the smart contract, and when a transaction occurs on it, its state changes and is updated on each node.

Once part of the blockchain, the smart contract’s terms cannot be changed, as there is no way to manipulate them without alerting the network. Again, the only thing that changes is his condition.

“Smart contracts are designed to faithfully do exactly what they’re programmed to do – no matter what. Once they’re started, no one can change them. The blockchain makes sure of that,” Boder said.

Plus, just like a contract from a lawyer, the logic of a smart contract cannot be distorted, as it is a binding agreement between two parties, one that is self-verifying and self-enforcing.

“Smart contracts that can be used without the users having to trust anyone, such as the developer or company that made them, are especially useful for applications or transactions that involve a transfer of value such as money exchange, finance, banking, legal contracts, bail , deeds/titles and insurance,” Boder explained.

“The beauty of smart contracts is that they are self-executing and do not require trust that your counterparty will honor their obligations,” Lifshitz added. “Once the specific conditions encoded in the smart contract are met, the contract will be automatically executed. This means, whatever your business, smart contracts can increase efficiency exponentially.”

What does smart contract code really look like?

Smart contracts use code similar to other programming languages. They essentially say, “if it happens, do it, otherwise, do nothing.” Smart contracts can interact with other smart contracts, creating more sophisticated functionality.

Here is an example of the code used to create a smart contract. It was written using Solidity, an object-oriented, high-level programming language specifically for smart contracts.

Once this code is written, it is compiled by the Solidity compiler and can be tested using the Ethereum Remix IDE, an open source browser-based IDE for Ethereum smart contracts. Once the smart contract is ready, you can deploy it on the Ethereum network, which costs around $400 to $2,000. Other blockchain networks may charge less, and some, such as Infura, allow the deployment of three smart contracts for free.

Smart contracts do have limitations

Businesses can use smart contracts in many applications, but as with any technology, they have limitations to consider first.

Smart contract transactions may not be completed as quickly as one might think. Congestion on a blockchain network, the time of day and internet latency can cause delayed transactions. As with stock market transactions, the costs involved vary. Cryptocurrency prices rise and fall in milliseconds, as do blockchain gas prices (the fee charged by blockchain networks to process a transaction), and this can affect the overall cost of a transaction.

Flexibility in a smart contract can also be an issue. Logic-based terms are often a challenge for legal experts to apply to certain contracts. Traditional contracts have a subjective element that deliberately uses terms such as “good faith” or “reasonable”, which provides flexibility. These relational contracts are different from transactional contracts, and it can be challenging to create smart contracts that can programmatically provide such flexibility.

Brands must also consider the legal ramifications of a contract. While smart contracts don’t require lawyers, that doesn’t mean you can ignore the legal complexities of contract creation. It still makes sense to have a lawyer or legal team review the contractual terms of any agreement.

“Smart contracts are immutable,” Lifshitz said. “This means that once a contract is executed, there are no take-backs. There is no access route through external mechanisms, such as courts. Smart contracts are coded by humans, and a smart contract is only as good as its code.

He added, “Poorly written code behind a smart contract can leave it open to outside exploitation. Smart contract hacks have recently led to the theft of significant digital currency, for example.”

Related Article: Understanding Web3’s Underpinning Blockchain Technology

Final Thoughts

Smart contracts can be used for a multitude of transactions and offer reliability, security and limitless accessibility. Understanding how smart contracts work, how they are created, and what they have in common with traditional contracts can enable brands to use them effectively – without hitting their limitations.