Discover the benefits and use cases of smart legal contracts in our comprehensive guide. Learn how these decentralized applications can increase efficiency, accuracy, security, and transparency in real estate, supply chain management, intellectual property, insurance, and employment contracts. Explore the challenges and limitations of this innovative technology and its future outlook.
What are smart legal contracts?
The term smart contract refers to a piece of code stored on a blockchain that executes contract terms when specified conditions are met. A smart contract follows a condition-based structure, so if or when certain conditions are met, a new action is initiated.
Code can include as many conditions as necessary, and it is usually built and implemented by programmers, not lawyers.
Smart legal contracts were the first major innovation in which traditional contracts were digitally automated, allowing users to guarantee an immediate outcome with minimal human involvement.
How do smart legal contracts work?
A smart legal contract is a piece of code written into the lines of a legal document and stored within a distributed, decentralized blockchain. This public database doesn't have a single owner; instead, its transactions are automatically processed without requiring any third-party involvement. The data is stored and linked in such a way that it can't be modified by either party, giving it an added layer of security. On the most basic level, these contracts monitor, execute and enforce agreements when certain events occur.
Just to name a few examples, actions such as receiving payment, authorizing transactions, providing services, and exchanging money could be carried out through a contingent execution process. For instance, when a buyer inserts money into a vending machine, a chocolate bar is automatically released, showcasing how one action triggers another to complete a transaction, but only if certain conditions are met.
Benefits of Smart Legal Contracts
The use of smart contracts has already been proven in a number of industries, including finance, gaming, and healthcare. Several advances in the legal sector also have the potential to be revolutionary and new because they allow parties to automate and digitalize the performance of conventional contracts safely.
It is possible to read smart legal contracts in normal language, but only partially in computer code recorded on an Enterprise Blockchain. In the computer code section, performance-related parts of the contract are automated, whereas, in the natural language section, the parties’ agreement is memorialised.
The benefits of smart legal contracts, which may be applied to almost any agreement, include the following:
As a result of automation, smart contracts eliminate unnecessary layers from the process of fulfilling contractual obligations, resulting in improved productivity. By utilizing pre-configured conditions, smart contracts could aid in the faster execution of trades within minutes.
In addition, actual Enterprise Private Blockchain smart contract instances demonstrate that they are much simpler than regular contracts. Smart contracts require less paperwork, are faster, and are more intuitive.
Time and money savings
Lawyers save time and money due to the streamlined contracting process and the elimination of long litigation processes.
Through encryption, smart contracts enhance security, data protection, and privacy. Furthermore, Smart contracts might offer a single, shareable, and secure copy of the agreement so that all parties are aware of the most recent version, thereby increasing accuracy, trust, and transparency.
As smart contracts are connected to digital devices, sources, and systems, they automatically take action on information from data-rich environments, such as confirmation of weather events or changes to applicable legislation.
Smart contracts promise a lot of value, so it seems logical to focus on real-world examples.
Use cases of smart legal contracts
Below are some examples of how smart contracts can be used in practice:
Smart contracts could be a game-changer for the real estate industry. By removing the need for brokers or intermediaries, such contracts may increase transaction speed, making it easier to document property ownership information. It is interesting to note that sellers can decide how a deal will go and this technology could bring about greater transparency and cost-effectiveness compared to title management. Tracking a property's history, location, as well as other pertinent data can also be facilitated with smart contracts, reducing any titling issues that could arise from transfers and subsequently, legal fees.
In supply chains, this 'smart contract' model could be beneficial, since delivery of an item can automatically result in it being remade or reordered much higher up the supply chain, even when multiple companies are involved. It is relatively minor to have negative consequences if an item is ordered incorrectly.
Medical data protection
Investigations are underway to identify the value benefits of automation within healthcare facilities and modern security measures. Cybercriminals have been targeting hospitals, aiming to get their hands on private patient data. Data breaches involving prominent healthcare brands such as UCLA Health have resulted in the theft of 4.5 million patient records, showing how important smart contracts may be in establishing a secure transfer of information between healthcare providers without compromising care standards. Smart contracts guarantee patient data is safe and kept on a blockchain, only retrievable with a private key known solely by the patient; giving them peace of mind that only the necessary individuals can access it, whilst being certain it remains secure at all times.
Correcting errors in trade finance
Smart legal contracts are seen as an extremely useful tool in trade finance due to their potential to reduce some of the most costly mistakes. Not only do they automate processes and simplify calculations, but they can also streamline transactions, potentially reducing working hours.
Corporates identify trade finance as one of the most significant applications of smart contracts, recognising their huge commercial value in both the short and long term. Smart contract technology is seen as essential to ensuring that financial services can cope with rapidly increasing transaction volumes. According to studies, annual cost savings by 2022 could be in the order of $15-20 billion.
Administrative payments and billing
Trust and transparency are must-haves for companies dealing with financial transactions, such as insurance. Escrows, the traditional money management process, can be vulnerable to manipulation from human interference. Payrolls can struggle to remain self-sufficient in global supply chains due to the complexities of the banking system, as well as different countries' systems requiring middlemen in certain circumstances.
This is increasingly problematic given this remote-first world where location does not have as much influence on employment and business as before. Smart legal contracts offer solutions to these payment problems; they are transparent, secure, cost-effective, and long-living — plus their automatization capabilities allow them to fit whatever payment need needs arise while preventing mismanagement of funds. Tax systems can also benefit from minimized administrative expenses and maintenance costs.
In conclusion, smart legal contracts are innovative, decentralized applications that offer several benefits over traditional contracts. They automate the performance of contracts and eliminate the need for intermediaries, resulting in increased efficiency, accuracy, security, and transparency. Smart legal contracts offer several benefits in various industries, such as real estate, supply chain management, intellectual property, insurance, and employment contracts.
Furthermore, smart legal contracts simplify and streamline the contracting process, save time and money, and enhance security, data protection, and privacy. While challenges and limitations exist, smart legal contracts have the potential to revolutionize the legal sector by automating and digitizing the performance of conventional contracts safely. It is no doubt that smart contracts will be an essential tool for the future, providing innovative solutions to existing challenges.
INDUSTRIA is a global technology consulting, development, and ventures company with expertise in the field of enterprise blockchain, confidential computing, process automation, and digital experience. As one of the official partners of R3, we are implementing cutting-edge blockchain technologies and reshaping the fintech world. At INDUSTRIA, we are focused on providing permissioned blockchain solutions, such as Central Bank Digital Currencies, Electronic Bill of Lading, and Smart Contracts. Our solutions apply to a wide range of industries and use cases to empower and modernise society.
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