In the debate of smart contract vs. traditional contract, it appears most likely that both will continue to evolve and be valuable.
What you will learn
Not all smart contracts, nor traditional contracts, are legally binding.
Some of the strengths of smart contracts can work against them in some applications.
Experts on contract law expect the two forms to co-exist for the foreseeable future.
Many believe the cryptocurrency ecosystem is all about bare-bones blockchain. Over time, another technology has become equally as important. Smart contracts are the workhorse of the blockchain world; without them, DeFi applications, NFTs, DAOs, and other decentralized blockchain-based applications wouldn't be possible.
If you've heard of smart contracts, you've likely wondered how they compare to traditional contracts and if they could ever replace them. This article will look from various angles at the question of smart contracts vs. traditional contracts.
Conventional contracts are agreements between two parties. Usually, these include contract terms relating to an exchange of value. In many cases, they represent a legally-binding agreement, although this isn't always the case.
Traditional oral contracts are verbal or written agreements between two parties. In some jurisdictions, oral contracts can be legally binding, but it's difficult to prove the terms if a contract breach occurs. Written contracts are generally legally binding if they contain a subject that details unambiguous terms and a consideration that describes the motive for the contract. Still, both parties must possess the legal authority to enter the agreement. For example, it isn't legally binding if you sign a contract to buy the Mona Lisa from someone who doesn't own the painting.
Smart contracts are self-executing contracts on the blockchain. These contracts don't require the authority of a third party and are nearly impossible to fake since the terms of a smart contract are immutably stored on a public distributed ledger. Smart contracts can be legally-enforceable if they contain the three conditions needed for binding written contracts; subject, consideration, and capacity. Still, because the terms of the agreement execute automatically once met, contract breaches are less likely to occur.
Pros
A smart contract provides more privacy than a traditional contract.
Despite the pseudo-anonymity, smart contract interactions are transparent and public.
Cons
Intoxicated users, minors, and individuals not of sound mind can engage smart contracts.
Contracting parties are nearly impossible to identify or take to court if fraud occurs.
The individual on the other end of the contract could be a bot, meaning the contract may not be legally enforceable.
Smart contract execution is significantly quicker than a traditional contract.
Utilizing a smart contract is easier to execute than a traditional contract.
There's no need to pay legal fees, hidden expenses, or human intervention.
People from around the globe can do business efficiently, democratizing access.
Smart contracts with weak code are susceptible to hacks.
Smart contracts often depend on on-chain oracles that feed off-chain, real-world information to the blockchain in a trusted way; some oracle providers are less reliable than others.
Traditional contracts can be forged or tampered with if they aren't verified and protected correctly.
Smart contracts cannot be changed once deployed.
Every interaction with every smart contract is recorded on the blockchain and can be audited.
Con
Smart contracts with vulnerabilities cannot be fixed once deployed.
You typically can't void transactions, as they are immutable.
A smart contract's terms execute automatically, meaning there isn't often a way for someone to breach the terms of the agreement.
A smart contract is usually executed instantaneously, making it far more efficient than a traditional one.
A smart contract does not put the parties in the vulnerable position of trusted intermediaries.
A smart contract is written in a programming language, meaning many individuals won't fully understand the terms. Scammers often purposefully misconfigure smart contracts to steal people's funds. Without programming knowledge, it can be difficult for average users to identify scams. This is one of the critical legal ways that smart contracts differ from traditional contracts, written with human language that people can grasp and not computer code.
Many experts in contract law believe it isn't likely that smart contracts will replace conventional contracts. A smart contract works well for "if/then" situations, such as an airline insurance policy that executes automatically if a flight is canceled. Deliberate ambiguity can't be accounted for in a smart contract, meaning agreements that involve someone's "best efforts" are impossible.
There are numerous situations where smart contracts are superior. A smart contract can handle nearly any agreement between two parties with straightforward, quantifiable terms and conditions. Smart contracts are beneficial for over-the-counter currency and derivatives trades. Additionally, smart contracts are often more accessible and efficient for international agreements with binary conditions.
In the future, we may see the two types of contracts merge in some instances. Users could create, agree upon, and sign a legally-binding written contract where the terms are executed automatically via smart contract. Oracles could be used to feed real-world contract information to the blockchain and execute smart contracts accordingly.
Smart contracts are evolving quickly, but it could be a while before we see an outcome in the battle of smart contracts vs. traditional. Still, the technology offers numerous advantages. The Hedera network is Ethereum-Virtual-Machine compatible, allowing developers to write smart contracts using Solidity. Hedera's contracts are optimized for hashgraph, resulting in lightning-fast finality and predictable fees.
Hedera is compatible with oracles and carbon-negative, making it an ideal solution for hybrid smart contracts.