Can Smart Contracts replace traditional contracts?

Smart Contracts brought a revolutionary approach to the implementation of the agreements. They enable to performance agreement and preset parameters without a centralized intermediary. That means the avoidance of multiple representations that can take place in the traditional contracts. If the definite parameter is set in the Smart Contract the result will always be unamended apart from any interpretations. This fact differs the Smart Contracts from the traditional contracts where there are often the possibilities of various readings. When such a  situation occurs, the parties need to apply to the court and the solving of discord takes a huge amount of time, money and efforts.

So what Smart Contract is? Let’s take a look at the most official definitions. According to Nick Szabo, who coined this term, “A Smart Contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises”. He described the idea of a Smart Contract more than 20 years ago. Nevertheless, there are still a lot of controversial opinions to such agreements. So the Smart Contract is a computer protocol that independently conducts transactions with full control over their implementation on the basis of mathematical algorithms.

The Smart Contracts still have some weak spots that delay its widespread use. Blockchain Ethereum is one of the first platforms which has implemented the Smart Contracts. But even its founder Vitalik Buterin stated that he regretted to name the Smart Contracts smart he should have called them “persistent scripts”. The main weaknesses of Smart Contracts are:

• the writing of the unique and reliable Smart Contract requires a high experienced specialist. The programmer’s errors can lead that the contract will work incorrectly to the prejudice of one party;
• the intransigence of Smart Contracts. While using the traditional contract there is the possibility to deal with the delay in production or payment. There is no such opportunity in Smart Contracts which can create a range of problems in case of unforeseen conditions;
• if the user loses an electronic key, there is no possibility to log in;
• the lack of control which can create the exposure of parties in case of conflicts or incorrect program work.

For the moment the sphere of Smart Contract application is limited with the ICO framework only. The Smart Contract protects the investors and gives them guarantees during the transactions. But in the future, the Smart Contracts can be used far beyond the ICO.

The Smart Contract can be used in sales and purchase transactions of real estate or cars. In this case, the seller creates the Smart Contract on the sale of the apartment and the buyer transfer Ethereum to such contract. The term of the contract stipulates that Ethereum is credited to the seller’s account only after the entry to the state register of real estate is made and the ownership is passed to the buyer. So that the buyer and the seller register the ownership transfer in the register of real estate by themselves and the Smart Contract credits the Ethereum to the seller’s account. Of course, the Smart Contract should be linked and synchronized with the state register of real estate, but also this will avoid such intermediaries, as banks, lawyers, notaries, etc.

Also, smart contact can be applied to insurance, elections, and taxation. The using of Smart Contract in such standardized transactions reduces the legal, banking costs and the costs of other organizations. That means that the transaction and administration costs will decrease a lot. The computer program is responsible for the contract execution. That avoids inequitable conduct of parties and intermediaries. Also, Smart Contract avoids any bureaucracy, corruption, and contrivances.

Nowadays lawyers have already taken into account the possible widespread application of Smart Contracts and many of them state that Smart Contracts can be given the status of a legal document in many countries. There are several theories in the legal world describing how Smart Contracts can be used in the jurisprudence. The particular model states the majority of documents will be written in the standard languages, but the Smart Contract can be appendixes to them. The hybrid model states that the traditional legal documents remain, but some particular terms will be fixed in Smart Contracts. So that in the future the layers should understand the language of Smart Contracts as well as they will be the part of legal documents.

To make a conclusion, we think that Smart Contracts won’t replace traditional contracts in the near future as there are still unsolved issues such as:

1. Smart Contracts can accept the only cryptocurrency for direct payments.
2. Smart Contracts can’t regulate complicated human agreements, they enable to fix just standard transactions for the moment.
3. It is impossible to make changes in the Smart Contract, which means that any mistake will lead to incorrect implementation.

Nevertheless, a lot of things changes every day. So above-described aspects can be transformed and developed. The fact is that the Smart Contracts will be the part of human juridical relations in near future.