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Risks You Can Encounter With Smart Contracts

Smart contracts

Smart contracts may sound confusing once you start to think about them. They do not ensure if the payments made have gone through, and they also do not offer a guarantee of decentralization in regards to banks and casinos.

Smart contracts may seem to have a lot of functionality to perform a lot of things, but it is worth noting that these contracts do not ensure anything. You may write or program a backdoor to access these smart contracts, and some may even assign admins that can steal away all the necessary funds it.

They may act like actual contracts, but we cannot hide that smart contracts are still new to us. What can you do if you encounter some Smart contract legal issues along the way? Before we go over these things, let us first define what a smart contract is.

Smart Contracts: Defined

Have you ever come to the point where you want to sell something without thinking about who might be the purchaser and what process or modes of payment will be used for the transaction? Imagine having a contract where the contract itself will be the one in charge of calculating the payment directly. And as well as arranging how goods are delivered while running on software code. That is what a smart contract is precise.

Like in the real world, contracts are agreements between two or more parties intended to be enforceable by law. Under these contracts, there are written obligations and responsibilities that each party has to fulfill. And because of the emergence of blockchain technology, these said contracts are now possible and can ensure enforcement of conditions in a contract to be done automatically.

A smart contract, by definition, is a contract specified in the digital form, including protocols and ground rules where the parties are to perform on the contract, making it possible to do so. The capabilities necessary and the data required to execute a smart contract to execute itself are present in the blockchain. These protocols are basically coded into the smart contracts in such a manner that once the obligations are met, the contract is executed right on.

But with that, smart contracts do not offer any decentralization whatsoever. If you look closer, smart contracts are nothing but permanent scripts in the blockchain, and they act as contracts that increase transaction speed and have functions that can be accounted for.

To keep it simple, smart contracts are blockchain programs that try to secure the processes that take place within the blockchain. They act like developers create rules to keep all transactions clear and transparent. To interact with these smart contracts, you should call into one of its functions or programs.

There are examples where a smart contract function can only be called upon through an Ethereum node to read some data out of the contract. There is another example where you can modify any data in the blockchain at the cost of sending a transaction and paying the gas fee in the process.

Now that we have defined what a smart contract is and the scopes of a smart contract, let us now see the risks involved with it.

Unrelatable Programming Languages

Now that the emergence of smart contracts may make business and transactions easy, not all people can understand the language used to create certain types of contracts.

As you can see, unlike the contracts where you use them in your daily life or for your business, such as mortgages or buying a brand new car, smart contracts are created using codes, and codes fall under many programming languages. 

The problem with this is that not all people can understand or read these specific types of programming languages. It may even seem impossible for some to understand and evaluate on their own.

Yes, smart contracts are contracts created to promote transparency on each transaction that both parties agree to. Still, because of the code used to write the smart contract, users who cannot easily understand or simply cannot read codes will have a hard time knowing if the contract will be as they would expect. 

Dependence on External and Outsourced Data

Like everything we see on the internet, these specific types of data are stored in a physical server somewhere. As smart contracts, they rely on external data on third-party programs that are known as oracles to help them perform their said functions. External data or information like the current prices of cryptocurrency, like Bitcoin or other assets, may be necessary for the smart contracts to perform their critical functions like calculating the exact conversion rate for the payment needed in the contract.

The problem with these is that since they rely and depend on external data, if the central server that these smart contracts rely on fails or crashes, they cannot perform their necessary functions. There are chances where hackers hack oracles and use them to their advantage. There are even instances where the whole server becomes corrupted, making the smart contract unusable.

This will still be an absolute risk unless there are ways for smart contracts to function without their dependence on external data.

Programming Flaws That Tend To Be Costly

Regarding the risks of smart contracts, flaws in their programming or code can result in costly errors and even loss of the properties or assets of the parties under the contract.

Back when Mt. Gox, a bitcoin exchange based in Japan, was the leading bitcoin exchange in the whole world. Apparently enough, they had suffered a lot of times from hackers in the form of data breaches and DDoS. It became possible for them to be hacked due to programming flaws which cost them to lose at least 850,000 bitcoins or $500 million.

The problem with programming flaws, the defects in the code can also be difficult to correct. Fixing a flaw in the code consumes a great amount of time due to governance structures that require votes on the proposed changes from the parties involved in the contract. Worse still, the programmers will have to rewrite a new code that allows the smart warranty to be void.

At the end of the day, rather than the transaction being fast, it will consume a lot of time from both parties since the programming suffers from errors.

Unclear Business Relationships, Responsibilities, and Liabilities

In real-world contracts, there should be a promisor, the person who promises to pay, and the promisee, the person who receives the benefits from the contract. Regardless of the contract’s roles, both parties are obligated to the contract. There are even instances where the third party or mediator also receives benefits from the contract.

A contract clearly states the roles, responsibilities, and obligations of each party involved. If one party fails to fulfill their role, it is clear they are responsible and who should be enforcing the other party to fulfill their role. In smart contracts, it is still not clear if ever there are instances that these scenarios arise.

There are still unresolved legal and regulatory questions in enforcing the structure and function of a smart contract between the involved parties. If a smart contract makes an error in the process, which party should be responsible for the damages, and how can they be resolved? Under which jurisdiction should be followed in resolving such problems?

You may even add that the flaw of smart contracts is the part that hinders the ability to make subjective choices since the smart contracts are now the ones that fulfill the agreement. What if the buyer wants to haggle with the seller’s price? What if the seller wants to add or remove the content of the things to be sold to the buyer?

For instance, a seller might excuse the buyer’s late payment excuse since he wants to preserve the buyer-seller relationship for future benefit. Perhaps the seller sees potential from their transaction, which may be influential to their benefit. As for smart contracts, they do not have the capability to do so and make such kinds of judgment calls. 

If the buyer fails to fulfill their part of the contract, the entire agreement becomes void, regardless of any reason. Smart contracts lack these key concerns since they are programmed to fulfill specific functions.

Closing thoughts

So there you have it. Smart contracts are beneficial to any type of transaction, and they seem to be no different from any other contract except for the fact that they are used for blockchain transactions. They still need some polishing to be free from dangerous risks, but they are a good form of contract.

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